What about the title insurance industry?  Well, their legislative “holy grail” was protection from so-called “hidden liens,” and their quest succeeded when the North Carolina General Assembly approved a preliminary notice procedure that creates a new party soon to be integral to the mechanics’ lien preservation process: the owner’s “lien agent.”

While I’ve never questioned the need to address the “hidden lien” issue, I am squarely on record as opposing this particular legislation in the particular manner in which it was passed.  Candidly, however, that battle’s been lost, and the industry’s focus needs to be on complying with the new regime.  Indeed, the statutory provisions governing the preliminary lien notices called for by the legislative revisions go into effect for virtually all private construction projects for which the first construction work commences today, April 1, 2013 (happy April Fool’s Day!), or later.

In other words, the horse it out of the barn, and it ain’t goin’ back in.  Time to saddle up and ride.  And so this post provides an introduction to the new preliminary lien notice each potential lien claimant must provide to the owner’s “lien agent” in order to fully preserve future lien rights under North Carolina’s mechanics’ lien statutes.  I’ll start with a quick primer on the problem of hidden liens, and then move through the basics of the new statute from the perspective of each party in the contractual chain, from the top down.  I’ve attached a multitude of links that should prove helpful in transitioning to this brave new world of mechanics’ lien preservation.

I keep hearing about “hidden liens.”  What the heck does that mean?

Fair question.  Let’s say you file a claim of lien on real property and serve it up the contractual chain, as is now required by virtue of last year’s legislative changes.  There’s absolutely nothing “hidden” about your lien at that point.

Now consider all of the time that has transpired since your first performance of work but before you filed and served your claim of lien.  During that time, you enjoyed lien rights against the real property.  Indeed, if you’re a prime contractor (i.e., GC, D/B, CM@R, etc.), your lien rights arose from the moment you commenced work on the project, and if you are forced to file a claim of lien down-the-road as a result of owner non-payment, your date of first furnishing is the priority date for your lien as against all other creditors who may have rights against the property.

Subs and suppliers get essentially the same deal.  By way of example, consider a general contractor who commences work on a traditional design-bid-build office building on July 1, 2012.  Now consider the GC’s curtain wall subcontractor, who orders certain specialty glass materials from a supplier on March 1, 2013.  If the glass supplier isn’t paid timely by the curtain wall sub, it might assert both a Claim of Lien Upon Funds and a Claim of Lien on Real Property.  By statute, the supplier is entitled to the same priority date applicable to the GC — i.e., the date of the GC’s first furnishing.

It’s this “relation back” of lien rights to the date of first furnishing that creates the “hidden lien” problem.  Prior to the filing of a claim of lien on property, lien rights are “inchoate,” a fancy lawyer word for “imperfectly formed.”  The lien is in existence, out there in the ether, but until the piece of paper entitled “Claim of Lien on Real Property” is filed and served, “perfecting” your lien, it’s entirely possible neither the owner nor its title insurer knows you exist — particularly if you’re a remote subcontractor.  The new lien agent statute is intended to address that problem, so there are no mechanics’ lien surprises after the owner conveys or refinances the property.

How does the statute address the hidden lien problem?

In a nutshell, it encourages owners to appoint a lien agent for the purpose of receiving preliminary lien notices from ANYBODY with potential lien rights in the property being approved.  If a lien agent is so designated, ALL potential lien claimants should submit the preliminary lien notice, referred to as the “Notice to Lien Agent” in the new statute.  It’s basically a “Hi, I’m here” notice that lets the lien agent know you’re involved in the project and could, someday, file a lien against the owner’s property.  But more on the meat of the notice later.

What are the consequences of not providing the Notice to Lien Agent?

If the property isn’t conveyed or refinanced prior to your filing of a Claim of Lien on Real Property, there are absolutely no consequences; your lien rights can be pursued as before the statute’s enactment.  If, however, a conveyance or refinancing occurs prior to your filing a Claim of Lien on Real Property and more than 15 days after your date of first furnishing, the consequences are dire: you will not be able to pursue your lien rights in the case of a conveyance, and the priority of your lien rights will be subordinate to the lender’s deed of trust in the case of a refinancing.  As I’ll discuss below, the safest course of action will be to provide your Notice to Lien Agent within 15 days of your first furnishing of labor and/or materials.

What are the owner’s responsibilities under the new regime?

No later than the time when the owner contracts with a prime contractor to improve the owner’s property, the owner must designate a lien agent for the sole purpose of receiving notices under the new regime.  The most convenient method of appointment likely will be the new online system launched by the title insurers at liensnc.com.  The title insurers have also published detailed instructions for appointing a lien agent, which I commend to your reading.

Who can the owner appoint as a lien agent, and how much can the lien agent be paid?

Only a title insurance company or title insurance agency authorized to do business in North Carolina that consents to serve in the capacity of lien agent may be appointed as same.  For improvements to one- or two-family dwelling units, the lien agent may collect a fee no greater than $25 from the owner; for all other improvements, the fee may not exceed $50.

I’m a design professional providing services prior to the execution of a contract for construction.  What if there’s no lien agent in placing during my pre-construction performance?

That depends on whether your contract is with the owner or with another design professional.  If you are in direct contractual privity with the owner and your contract does not include the lien agent information, the owner is responsible for providing your contact information to its lien agent upon the owner’s appointment of same.  If you are a design subcontractor, you should make a written request to the owner for the lien agent’s contact information.  By statute, you will have no obligation to comply with the preliminary notice requirements until you receive the contact information you have requested.

What does the Notice to Lien Agent look like, and how should I file it?

The Construction Law Section of the North Carolina Bar Association has published this form Notice to Lien Agent, which is substantially similar to the form recommended by the statute.  The statute permits filing by a variety of methods, including certified mail, return receipt requested; physical delivery to the lien agent so long as  a delivery receipt is obtained; and fax transmission so long as a facsimile transmission confirmation is obtained.  I suspect the most convenient method for contractors and subcontractors to file the Notice to Lien Agent will be the online application at liensnc.com.  In any event, I recommend reviewing the detailed instructions the title insurers have published for providing the preliminary lien notice.

I’m a prime contractor.  The owner knows who I am.  Certainly I don’t have to comply with preliminary notice requirements, right?

Wrong.  ALL potential lien claimants must provide the preliminary notice.  However, where the contract is for the construction of a single-family residence and the lien agent is identified in that contract, it is the owner’s, not the prime contractor’s, responsibility for providing the lien agent with the prime contractor’s contact information.

I’m a first-tier subcontractor providing on-site labor for the project.  How do I find the lien agent information? 

Start by reviewing the building permit in the permit box; my suspicion is you’ll find the information there, and potentially a QR Code to facilitate use of the online system.  By statute, if the lien agent’s information is not contained in the building permit or attachment thereto, a sign disclosing the lien agent’s information must be conspicuously and continuously posted on the property until the completion of all construction.

I’m a supplier who is not required to provide on-site labor for the project.  How do I receive the lien agent’s information?

By statute, the party above you in the contractual chain must provide you with the lien agent’s information within three days of contracting.  If the information is not provided, the party with whom you contracted may be liable for any actual damages you incurred as a result of the failure to give notice.  To avoid such liability, primes and sums entering into supply contracts should amend their purchase orders or other contract forms to include the lien agent information in a conspicuous location.

Does the statute apply to existing construction projects?

No; it only applies to improvements to real property for which the first furnishing of labor or materials at the site of improvements occurred on or after April 1, 2013.

I just signed my contract and don’t want to be seen as a problem out of the gate.  Should I delay filing my Notice to Lien Agent?

Repeat after me: the Notice to Lien Agent is not a lien.

Again: the Notice to Lien Agent is not a lien.

Louder: THE NOTICE TO LIEN AGENT IS NOT A LIEN!!! 

This new Notice to Lien Agent regime is about letting the owner and its title insurer know that you’re involved on the project; the preliminary notice does not encumber the property or the contract funds.  So you are not damaging the project — or, more importantly, your reputation – by filing the Notice to Lien Agent.  You are merely preserving your lien rights should you ever need to rely upon them in the future.

From this date forward, every party in the contractual chain is going to get in the habit of complying with the new preliminary lien notice requirements.  You should, too.

Boil it down for me: what’s the best way to protect my lien rights on projects commencing on or after April 1, 2013?

As mentioned above, your lien rights are only compromised under the new regime if you’ve failed to provide the preliminary notice and there’s been a sale or refinancing of the property.  You may not, however, have any advance notice of when a sale or refinancing may occur.  Since the statute provides a 15-day “grace period” for filing the notice, with the clock starting on the first day of your performance, your best bet is to establish internal protocols for obtaining the lien agent information and filing your preliminary lien notice within 15 days of first performance on EVERY project.  An experienced construction attorney can help you mind your p’s and q’s and ensure your rights are preserved timely.

SB 232 would give the lowest responsible, responsive “local bidder” the opportunity to match the bid of the lowest responsible, responsive “non-local” bidder, but only if the local low bid is no greater than five percent (5%) or ten thousand dollars ($10,000) of the bid of the “non-local” low bid.  “Local bidder” would be defined as a bidder that has paid unemployment or income taxes in North Carolina and whose principal place of business is located within the boundaries of the county or municipality giving the preference.  A “non-local bidder” would be any entity other than a “local bidder.”

Proponents of local bidder preference statutes like SB 232 typically cite the following two advantages of such legislation:

• Local bidder preferences provide business development opportunities for local companies, potentially resulting in a broader local tax base; and
• Bidder preference legislation could provide an incentive for businesses to stay in North Carolina, rather than relocate out-of-state.

Opponents of such preferences typically cite the following three primary disadvantages:

• Bidder preferences decrease competition on public construction project by discouraging “non-local” businesses from bidding in the first place, thereby driving up project costs ultimately borne by taxpayers;
• Neighboring states will reciprocate, potentially reducing out-of-state opportunities for in-state contractors; and
• Giving the low “local bidder” a “second bite at the apple” runs contrary to the primary public policies underpinning the public bid statutes: open competition, equal footing, impartiality and best value.

(Incidentally, the National Institute of Governmental Purchasing is hosting a webinar this Thursday about the pros and cons of local preferences; you can find details about the program at Mike Purdy’s excellent Public Contracting Blog here).

Where do I stand?  At the moment, I lack research suggesting that the potential benefits of SB 232 would outweigh its potential costs.  In the absense of such research, my suspicion is that if “non-local” bidders are discouraged from submitting proposals on any given city, town or county procurement, the result will be higher prices on North Carolina school, criminal justice and other public facilities.  That would be bad news for taxpayers, and bad news for prime contractors, particularly if the overall effect of higher per-project costs is a reduction in the total number of public construction projects bid annually.  Then there’s the issue of underserved rural communities that may have few experienced, high-quality commercial general contracting firms within their borders.  Providing a bidding advantage to inexperienced local firms might not only drive up costs, but also compromise quality.

At a minimum, then, I believe that the potential costs and benefits of SB 232 should be thoroughly studied by NCGA’s legislative research service before any votes are taken, in committee or otherwise.  And so for now, and in the absence of research demonstrating that the benefits of SB 232 would outweigh its costs, I stand with North Carolina’s leading trade association for prime contractors, Carolinas AGC, in opposing the bill (full disclosure: Lewis & Roberts is a member of CAGC).  FYI, the organization has made it easy to express opposition to the legislation here.

I’m keenly interested in hearing other viewpoints on this issue.  As always, your comments are welcome.

This post explains the “double payment” provisions of the new lien/bond laws in-depth, focusing on how prime contractors are exposed to double payment liability on public projects, how the new statute provides protection from that exposure, and the limits of the new legislation.

How does a general contractor, construction manager at-risk, design-builder or other prime contractor become exposed to double payment liability on bonded public projects?

When the payments they make to first-tier subs don’t reach second- or third-tier subcontractors (who I refer to as “remote subs”).  When that occurs, the unpaid remote sub might assert a payment bond claim (i.e., a so-called “Little Miller Act” claim) against the prime contractor and its bonding company.  Bear in mind that in order to obtain bonding capacity in the first place, the prime contractor likely has provided its surety with an indemnity agreement requiring the prime contractor (and very likely the individuals who control it, plus their spouses) to reimburse the surety for any losses incurred under the bonds it issues.  As a result, a solvent prime contractor in receipt of a valid payment bond claim will typically pay it, rather than reimburse its bonding company for doing so.  In either event, the prime contractor is financially on-the-hook for paying the remote sub after having already paid the first-tier sub monies that should have been floated downstream.

What does the new legislation do to protect GC’s from double payment liability?

It creates a system of notices to ensure that prime contractors know who is supplying labor and materials to their first-tier subs.  A remote sub who fails to comply with the new notice obligations timely will find its payment bond rights significantly limited, as will be discussed below.

What obligations does the new legislation place on prime contractors?

The first of the notices to be served is the “Contractor’s Project Statement,” which the prime contractor must provide to each of its first-tier subs.  The Contractor’s Project Statement should set forth the name of the project, the physical address of the project, the name of the contracting body, the name of the prime contractor, the contact info for the prime contractor’s agent designated to accept requests for the payment bond, and the contact info for the surety company providing the bond.  A template form prepared by the Lien Law Committee of the North Carolina Bar Association’s Construction Law Section can be found here (this form is for educational purposes only; you should contact an experienced construction law attorney to ensure you’re completing the form appropriately).

What obligations are placed on subs and suppliers?

First-tier subs must pass the statement down to their second-tier subs, and second-tier subs must pass the statement down to third-tier subs.  (Note that North Carolina’s public bond statute makes no reference to fourth-tier or more remote subcontractors).  All second- and third-tier subs must then furnish the prime contractor with a “Notice of Public Subcontract,” setting forth the name and address of the sub providing the notice, a general description of the real property on which labor and/or materials are to be furnished, a general description of the sub’s contract (including the names and addresses of the parties thereto), and a general description of the labor and/or materials to be furnished pursuant to that contract.  A template form prepared by the Lien Law Committee of the NCBA’s Construction Law Section can be found here (same caveat as above: this form is for educational purposes only, and you should contact an experienced construction law attorney to ensure you’re completing the form appropriately).

What if the Contractor’s Project Statement is not furnished down to all remote subs with potential bond rights?

If you’re a second- or third-tier sub who has not received a copy of the Contractor’s Project Statement from the party immediately above you in the contractual chain, that party cannot enforce its deal against you.  Presumably — but subject to judicial interpretation — that means you have no obligation to furnish labor and/or materials pursuant to your contract until the Contractor’s Project Statement is received, even if your non-performance delays the project.

If a remote sub doesn’t receive a copy of the Contractor’s Project Statement but performs anyway, does it still have to comply with the Notice of Public Subcontract requirements?

Probably, but that’s an open question the courts may have to resolve some day.  Personally, the only remedy I think the statute provides when a remote sub doesn’t receive a copy of the Contractor’s Project Statement is excuse from performance, as I’ve discussed above.  If, however, a remote sub elects to waive that remedy and perform anyway, I don’t see language in the statute excusing that sub from complying with the new Notice of Public Subcontract requirements.

That being said, the courts conceivably could interpret the provision of the Contractor’s Project Statement as a condition precedent to the provision of the Notice of Public Subcontract.  Still, you don’t want yours to be the test case.  So if you’re a second- or third-tier sub and you perform despite not receiving the Contractor’s Project Statement, you should strongly consider serving the Notice of Public Subcontract within 75 days of your first furnishing, as the hypothetical immediately below demonstrates.

What happens to the payment bond rights of second- or third-tier subs when they don’t provide a Notice of Public Subcontract timely?

The new statute limits payment bond recovery to labor or materials provided within 75 days of the remote sub’s provision of the Notice of Public Subcontract to the prime contract.  There’s a $20,000 “safe harbor,” so that any claim of $20,000 or less is not subject to the Notice of Public Subcontract requirement; further, for claims greater than $20,000, the new requirement will only apply to that portion of the claim in excess of $20,000.

A quick hypothetical will illustrate these limits.  Awesome Aggregates Co., a second-tier sub to first-tier Successful Sitework Corp. on a large public university project, furnishes $50,000 in stone materials on Day 1, an additional $40,000 in stone materials on Day 60, and its Notice of Public Subcontract to Perfect Prime Contractor Co. on Day 80.  Successful Sitework has a less-than-successful year, folds up shop, and files for bankruptcy protection, leaving AA completely unpaid on both shipments.   Unfortunately for AA, its first furnishing on Day 1 was 79 days prior to its service of its Notice of Public Subcontract.  That means the new statute prevents AA from seeking anything greater than $20,000 against PPC’s payment bond in connection with the first shipment.   AA is left with a payment bond claim for the first $20,000 on its initial shipment, plus a claim on the entire $40,000 second shipment, for a total claim against PPC’s payment bond of $60,000.  AA would have had a $90,000 claim, had it only furnished its Notice of Public Subcontract more timely.

I want a copy of the prime contractor’s payment bond.  Can I get it directly from the prime contractor under the revised statute?

Yes, so long as the request is in writing and served on the prime contractor via one of the statutorily approved methods — which include certified mail, but NOT email.

What happens if the prime contractor fails to comply?

The statute provides that if the prime contractor fails to respond within seven (7) calendar days of the request, the remote sub’s payment bond claim will not be limited, even if the sub failed to provide the Notice of Public Subcontract timely.   That means a remote sub who fears its Notice of Public Subcontract might be late has a possible “escape hatch” – making a request for a copy of the payment bond with the hope that it’s provided late, or not at all.  So heads-up, general contractors: furnish a copy of your payment bond IMMEDIATELY upon receipt of a request for same.

Let’s assume everyone in the contractual chain provides the notices required by the new statute timely.  How does that protect the prime contractor from the risk of double payment?

Candidly, it doesn’t.  In that situation, the prime contractor is only armed with information, and nothing more.

So if the statutory protection is limited, what else can prime contractors do to protect themselves from double payment liability on bonded public contracts?

There are several additional tools in a prime contractor’s double payment risk mitigation toolbox:

• Consider periodically calling all of the second- and third-tier subs who provided you with a Notice of Public Subcontract to ensure your payments to first-tier subs are reaching them.
• Consider making execution and delivery of partial lien waivers a condition precedent to all payments you make to your first-tier subs, and consider requiring your first-tier subs to include a similar requirement in all of their agreements with second-tier subs.
• Consider entering into joint check agreements, particularly where you have reason to fear payments to first-tier subs might not reach all folks downstream.
• Consider requiring performance and payment bonds from your most critical first-tier subs.

What is the effective date of the legislation?

The statute, codified at N.C. Gen. Stat. § 44A-27(b-f), took effect on January 1, 2013 and applies to all bonded public projects for which the initial building permit issued on or after that date.

David Morrison

It’s a pleasure to welcome the thoughts of David Morrison of the United Kingdom to NC Construction Law, Policy & News.  David has been a contractor, subcontractor, trader and project manager throughout his years in the construction industry.  Beginning life mixing concrete in Hackney, London in the 1980s, David soon began to develop a reputation as the “pen pusher” on-site when he became interested in law and legislation in the industry.  Having experienced both sides of construction disputes, David now enjoys a much more tranquil life on the marketing team at UK Tool Centre.  Admittedly, he does miss the smell of mortar and bacon at dawn, though…

Having a contract properly prepared and signed is the single most important aspect of securing payment for work carried out by tradesmen.  A document that clearly expresses the expectations of both customer and tradesman is invaluable should any dispute arise regarding work carried out and its worth.  Tradesmen in the UK should familiarise themselves with the Supply of Goods & Services Act 1982 and have their contracts and workmanship adhere to its specifications to ensure prompt payment for services rendered and the legal right of entitlement if payment in part or in whole is withheld.

Tradesmen are legally required to perform installations or repairs with a certain level of care and skill.  In cases where payment is withheld by a customer who believes that this level was not met and this is deemed unfair by a tradesman, the matter can be referred to a third party for resolution.  An arbitrator, or ombudsman, may be consulted to judge whether standards have been maintained and their decision will be binding on both parties.  A tradesman also has recourse to the small claims court if the withheld payment is below a certain amount or a higher authority if this amount is exceeded.  If either of these avenues is decided on, then it becomes a matter of how the chosen authority interprets ‘reasonable care and skill’.

If a contract exists that clearly defines the work agreed to by a tradesman and such work satisfactorily complies with what has been agreed, then a customer will legally be required to pay the amount stated in the contract.  The importance of the contract cannot, thus, be overstated.  An oral contract is vulnerable to a far wider definition of what could reasonably be expected by a customer both in materials supplied and in the standard of workmanship provided.

Lien laws in Britain can be complicated to summarise when it comes to the timeframe of their viability.  These can change and alter daily with an ongoing project and would need close consultation to determine the actionable period of each situation.  British liens place a legal obligation on the individual responsible for the private project to accept responsibility of payments to tradesmen.  Sub-contractors generally have 60 days to submit a lien after a job, whilst general contractors have only 30.  Both public and private liens in the UK adhere to the same set of regulations outlined in the revised Supply of Goods & Services Act 1982, which differs from the majority of mainland Europe.  Private tradesmen are often more exposed to the risks of working without lien rights, but the case is slightly different in the British Isles.

In the past, public projects have been difficult waters for British tradesmen who are operating under payment bonds rights.  In 2012 legislation was passed in The Commons to protect contractors working on public projects; assurances were made that payment bonds would result in “holding fast protection against lack of payment.”  Henceforth any private disputes between subcontractors and general contractors, including private contracts, would be second to the rights of the payment bonds.

Laws are generally set up to protect consumers from unscrupulous business practices, but those same laws also offer protection against unreasonable actions taken by a customer; such as refusal to make payment.  A customer is legally obliged to pay for services rendered and then to reclaim from a service provider any costs involved in repairs, or making changes to work done if it can be proved to be as the result of negligence.

Legal proceedings can, however, be both protracted and costly and, again, a well-drawn contract can is invaluable in avoiding the blame game.  A deposit, which covers the cost of materials to be purchased, can reasonably be written into a contract, with the approval of these materials, prior to commencement of the job, being granted to the customer if so desired by them.  ‘Get it in writing,’ is a good code to live by.  If materials, standard of workmanship and an estimated date of completion are clearly contractually defined and adhered to, then obtaining payment should present no problem.

Thanks again, David!  As always, comments are welcome. 

In light of the Ramey Kemp decision, general contractors might well ask themselves, “Gee, if an engineer’s project status letter is a lienable activity on a construction project, how about the close-out paperwork I’ve gotta provide under my contract, particularly as-builts?”

Good question. 

Virtually every prime contract I’ve ever seen requires a variety of close-out documents – including as-built drawings – as a condition precedent to the release of retainage and final payment.  If an engineer’s preparation of a status update letter is sufficient to trigger the 120-deadline, shouldn’t as-built drawing preparation, usually performed after substantial completion, be considered a similarly lienable activity?  After all, both activities involve paperwork, and both activities might be contractually required.  Are North Carolina’s courts likely to treat these activities the same way for the purposes of determining a project participant’s date of last furnishing of services?

Probably not.  Here’s why.

Any court considering the issue would likely start with the definition of “Improve” in the lien statutes.  And unfortunately for contractors, a strict reading of that term’s definition leads me to believe that any attempt to classify as-built drawings as an “improvement” to real property would be a tough sell.  To facilitate the analysis, I’ve divided the definition of “Improve,” found at N.C. Gen. Stat. § 44A-7(3), into three colored segments below:

In blue, you’ll see the portion of the definition applicable to contractors.  In yellow is the portion of the definition applicable to design professionals.  In green is the portion of the definition applicable to rental equipment suppliers.

The majority opinion in the Ramey Kemp decision focused on the yellow portion of the definition in holding that the preparation of a status update letter is one of the “professional or skilled services” typically performed by design professionals, and is therefore lienable.  The blue portion of the definition, however, is what applies to building contractors.  That language does not give me a level of comfort that as-built preparation is a lienable activity.  In blue, I only see language related to on-site work on the property itself; I don’t see language related to the paperwork that might arise from that on-site work.  So while the COA has held that a design professional’s paperwork constitutes an “improvement” to real property, I think a contractor would face an uphill climb proving that its paperwork can be similarly classified.

Bottom line, the Ramey Kemp decision hasn’t changed my view about how general contractors should calendar their lien deadlines.  Indeed, my general rule-of-thumb remains unchanged: calendar the 120-day mechanics’ lien deadline from the date of your last performance of on-site, pre-substantial completion, non-punch list work.

Yes, a strong argument can be made that legitimate punch list work performed post-substantial completion is a lienable activity, and I’d be very comfortable defending that position in court, if the need were ever to arise.  But when it comes preserving statutory lien rights, and given how strictly courts tend to apply mechanics’ lien statutes, the conservative approach is always the best.  So determine the date your last sub — or your own crew, if it self-performed the last project activity – completed non-punch list work, count 120 days from there and mark your calendar accordingly.

Better still, run that proposed deadline by an experienced construction lawyer to ensure that all unique facts are considered and your mechanics’ lien rights are adequately preserved.

Potential lien claimants in North Carolina may want to get comfortable with QR code reader technology.

Ever since its passage last summer, North Carolina’s so-called “lien agent statute” has caused much consternation throughout the commercial construction industry, with many contractors, subs and suppliers worried that it will be inconvenient and expensive for them to comply with the statute’s various requirements (which I’ll be discussing in detail as my “Lien & Bond Law Revolution” series continues in the weeks ahead).  The title insurance industry, however, has tried to assure leery potential lien claimants that an online application will make filing preliminary lien notices convenient and inexpensive.

This week, we’ll get down to where the rubber meets the road on that assurance.

On Thursday, February 21, at 10:00 a.m., attorney David Ferrell of Vandeventer Black, legal counsel for the NC Land Title Association, will show a video demonstration/overview of the proposed online system.  The demonstration will take place in Room 424 of the Legislative Office Building in downtown Raleigh.  Mr. Ferrell will then demonstrate the system for construction lawyers during lunch at Thursday’s day-long CLE program at the North Carolina Bar Center in Cary.

Based on a meeting I attended last Thursday as a member of the Triangle Government Affairs Committee of ABC of the Carolinas, the proposed system will utilize “Quick Response” (“QR”) code technology to facilitate the filing of preliminary lien notices.  Here’s how I understand the technology would work: potential lien claimants would download a suitable QR code reader app onto their iPhones, iPads, Androids or similar devices.  The claimant would then find the project’s QR code in the permit box, using its smartdevice to scan the code.  The app would then populate all of the project information necessary for the potential lien claimant to fill out and deliver to the lien agent a bit of information about itself, its contract and its scope.  The system would then deliver to the potential lien claimant a receipt of the transaction.

Sounds simple enough, at least in theory.  But what about in the real world?

• Would use of the technology by owners and their title insurers be mandatory or voluntary?
• How would this technology simplify the preliminary lien notice process of an employer whose employees are not furnished with smartphones or comparable devices?
• How would material suppliers, who might never step foot on the project site, make use of the app?
• Would general contractors be able to use the app to determine the identities of second-tier and lower subs on the project?
• How does the NC Land Title Association intend to educate North Carolina’s construction industry about the app in advance of the lien agent statute’s effective date of April 1, 2013?

These are just a few of the questions I envision being asked at Thursday’s demonstrations.

I encourage all interested parties concerned about implementation of the lien agent statute to attend Thursday’s demonstrations and seek clarification on all of the questions they may have about the technology.  If you plan to attend the 10:00 a.m. demonstration, please send an RSVP to Bill Patterson, staff attorney for the NC General Assembly’s Research Division, at Bill.Patterson@ncleg.net by the close-of-business on Tuesday, February 19.

UPDATED 2/25/2013: LiensNC, LLC, the provider of the online app described in this post, has launched its webpage, which you can find here.  Although the site is still under construction, a narrated PowerPoint overview introducing the features of the online app can be downloaded.  It’s 5 minutes very well spent.

I’ll have additional perspectives on the lien agent statute and this new online app as the April 1, 2013 effective date for the legislation draws nearer.

I’ll give you three.

First, consider the general contractor who submitted allegedly inflated change orders on various projects financed by the U.S. Department of Justice and Army Corps of Engineers.  The government alleged that the change order requests included CGL and workers’ comp insurance rates that had additional “cushions” above and beyond what the GC had actually incurred.  Although the contractor denied liability, it agreed last week to settle the government’s fraud allegations by paying the United States $367,500.

Next, consider the general contractor whose subcontractor failed to pay prevailing wages under the Davis Bacon Act on a U.S. Department of the Army contract.  The GC’s certified payroll records inaccurately represented that prevailing wages were paid to all subcontractor employees.  In October 2012, the U.S. Court of Appeals for the Sixth Circuit upheld a U.S. District Court’s $1.66 million judgment against the GC, but remanded the case for a recalculation of damages that could end up saving the GC at least a little bit of money.

Finally, consider the general contractor who overstated the costs it incurred participating in the U.S. Department of Defense’s Mentor-Protégé Program, designed to provide developmental assistance to disadvantaged small businesses.  The government alleged that the contractor submitted more than 20 requests for payment in connection with the program that significantly overstated the amount of developmental assistance actually provided.  In December 2012, the contractor agreed to pay a $2 million penalty to avoid prosecution by the government.

Three cases.  Millions of dollars.  One conclusion: submitting false claims in connection with federal contracting can be extremely expensive.

And with a three year-old North Carolina False Claims Act law on the books, the risk of submitting false claims on state construction projects must be managed as well.

The Federal False Claims Act.

Codified at 31 U.S.C. §§ 3729-3733, the Federal False Claims Act (“FCA”) is intended to deter persons from knowingly presenting or causing to be presented a false or fraudulent claim for payment from the U.S. Government.  The term “knowingly” does not require actual knowledge that the claim is false; a person who acts in reckless disregard or in deliberate ignorance of the truth or falsity of the information can also be found liable under the Act.  When a defendant is found liable for a violation under the FCA, the government can recover up to three times its actual damages.

Further, the FCA allows private persons to file suits for violations of the statute on behalf of the U.S. Government, and if the government successfully intervenes in the case, the whistleblower or “relator” is entitled to receive between 15-25 percent of the amount recovered.  If the relator prosecutes the claim without the assistance of the government, its share is increased to 25-30%.  The FCA also provides relief from retaliatory actions that may be taken against the whistleblower by his or her employer.

A helpful overview of the FCA can be found here.

North Carolina’s False Claims Act.

False claims exposure is not limited to federal contracting.  On the books since January 1, 2010, North Carolina’s own False Claims Act, codified at N.C. Gen. Stat. § 1-605 et seq., is intended to deter persons from knowingly presenting or causing to be presented a false or fraudulent claim for payment from the State.  Like the federal statute, North Carolina’s False Claims Act permits judges to order defendants to pay up to three times the actual harm incurred by the State, rewards whistleblowers who assist with claims with a share of any recovery obtained and protects whistleblowers from retaliation by their employers.

Guarding Against False Claims Act Liability.

Now more than ever, contractors must establish and employ consistent oversight procedures to avoid false claims act exposure on federal and state construction projects.  Although the following list is certainly not exhaustive, below are a few trouble areas contractors should bear in mind:

• Bid Preparation.  When bidding work subject to MBE/WBE/DBE requirements, prime contractors must be sure their proposals accurately reflect the extent of such participation.  Otherwise, the government could argue the entire contract was obtained through fraud and that every subsequent pay application represents a false claim.

• Periodic Payments.  Front-loading early applications for payment is a risky proposition, with the amount of the overstatement arguably representing a false claim.  The safest course is to invoice only for actual costs incurred and/or percentage of work accomplished during any given pay period.

• Regulatory Compliance.  For projects requiring payment of prevailing wages under the Davis Bacon Act, general contractors must ensure not only that their own forces are getting paid the appropriate rates, but also that their subcontractors are abiding by the law as well.  Otherwise, the government could argue that every payment made in reliance on inaccurate prevailing wage certifications represents a false claim.

• Claim Submission.  Before passing subcontractor claims through to public owners, general contractors should satisfy themselves not only that the subcontractor’s claim is meritorious, but also that the subcontractor has accurately calculated its damages.  Otherwise, all or part of the subcontractor’s claim could constitute a false claim for which the GC might be liable.

False claims act exposure creates a minefield for contractors in the world of public contracting.  When in doubt, contact an experienced construction attorney with any questions you may have about avoiding or defending against false claims act liability.

Image under license from istockphoto.com

The North Carolina Court of Appeals (“COA”) this morning issued a 33-page opinion clarifying the types of professional engineering services entitled to a claim of lien under North Carolina’s mechanics’ lien statutes.  One of the three COA judges, however, issued a dissenting opinion, which means further review by the North Carolina Supreme Court could be in the offing.  This post explores the facts of Ramey Kemp & Associates, Inc. v. Richmond Hills Residential Partners, LLC et al., discusses the majority and dissenting opinions, and comments on the important points to take away from the decision.

THE FACTS

The agreement giving rise to the lien dispute at issue was a professional design services contract related to traffic engineering services on a Wake County development.  The engineer’s professional services began in 2005, but the development stalled when the bottom fell out of the economy in 2009.  Indeed, the North Carolina Department of Transportation voided permits authorizing construction of access driveways on January 16, 2009 due to the low level of construction activity on-site.

The last work performed by the engineer on the project was a February 2010 status report of outstanding or unresolved engineering issues, prepared at the project owner’s request to facilitate its marketing of the property to a potential purchaser.  The engineer’s work on the status update letter and previous services went unpaid, and it filed a claim of lien on March 30, 2000.  The claim of lien alleged that the engineer had last performed on February 24, 2010.

Meanwhile, the lender that had financed the development foreclosed on the property after the owner defaulted on its loan obligations.  The bank bought the property at foreclosure sale on February 26, 2010 and transferred it to a third party on June 26, 2010.

When the engineer sued to enforce its lien, the bank and new property owner, named as defendants in the action, argued that the engineer could not treat the February 2010 status update as the date upon which services were last furnished for the purposes of evaluating whether the lien was filed within 120 days of last performance, as required by N.C. Gen. Stat. s. 44A-12(b).  The trial court disagreed, effectively ruling that the new owner had taken the property from the bank subject to the engineer’s lien.  The bank and new property owner appealed.

COURT OF APPEALS OUTCOME

Relying on an affidavit the engineer had filed with its summary judgment papers in the trial court, the COA agreed with the court below that: (1) the professional services performed by the engineer typically span months or even years on a typical development, sometimes with long gaps between service; (2) the parties to the contract in question intended the engineer’s services to constitute one seamless contract; (3) the work performed by the engineer was not piecemeal and subject to separate contracts, but rather performed under a single contract; and (4) the status report drafted in February 2010 was the type of work the parties would have expected on a development such as the one in question.  The COA further found that the defendants had introduced no evidence contradicting these four facts, and that they were sufficient to establish a last date of furnishing of February 24, 2010.  The engineer’s March 30, 2010 claim of lien was therefore timely.

Just as importantly to architects and engineers in North Carolina, the COA found that the definition of “Improve” under N.C. Gen. Stat. s. 44A-7 specifically embraces “design or other professional or skilled services furnished by architects, engineers, [or] land surveyors,” and that the engineer’s status update letter fell within the scope of that definition.

Unfortunately for the engineer, however, one of the three COA judges agreed with the defendants that sufficient evidence existed to support their “two contract” theory.  The dissenting judge found that the author of the affidavit relied upon by the majority had given deposition testimony post-dating the affidavit that raised questions about his actual knowledge of the 2005 contract in question, “potentially contradicting [his] self-serving definitive statements that there was only one contract[.]“  This dissenting vote provides the defendants with the right to request review by the North Carolina Supreme Court, and assuming such a request is made, the outcome of this case may be far from over.

THE KEY TAKEAWAYS

Regardless what may transpire should the Ramey Kemp decision be appealed to the Supreme Court, a few points are worth observing:

• Architects and engineers have broad rights to assert mechanics’ liens in North Carolina.  Even services such as providing status updates at the owner’s request may be lienable.  Design professionals and their attorneys should take note.
• Whether you’re a design professional or a building contractor, your lien rights depend on whether you perform services on any given project under one contract or under multiple contracts.  To take maximum advantage of the “relation back” of liens to your date of first furnishing, it is advisable to provide all project services under a single contract, modified, if necessary, by change orders.
• Construction litigators should never assume that what a witness will say at a deposition will comport with what it averred in a previous affidavit.  It is essential to explore all facts averred in and related to an affidavit during the deposition preparation process.

At the risk — no, the certainty — of sounding cliché, it’s an honor just to be nominated.  Seriously.  Have you visited the other nominees recently?  There’s just an incredible variety and depth of knowledge being shared out there.  This blog has been going strong for about a year now, but in all candor, I still consider myself one of the new kids on the A/E/C social media block.

So while I am in Bob Kruhm’s debt, and would be enormously grateful to receive your vote, I don’t feel comfortable asking for it.  Not yet, with my relatively limited track record.  Instead, I’d like to ask you for something else: your engagement in this great, growing, vibrant community.  I’d like you to treat this competition as I’ll be treating it: as a celebration of the knowledge, experience and dedication A/E/C professionals across the country are sharing day-in, day-out for the benefit of the larger construction industry.  Please join me in taking the time over the next two months to explore each of the nominated blogs, and the blogs they link to.  Consider subscribing to them, by e-mail or RSS feed.  Comment on them frequently (and respectfully).  Engage with the authors on Twitter and elsewhere.  Benefit from the acquired wisdom of others, and share your own.

Finally, I’d ask that you let me know if there are topics you’d like to see covered here that would assist you and your organization travel your own unique critical paths.  As always, thank you for reading N.C. Construction Law, Policy & News.

Photo Credit: Marietta Daily Journal

This afternoon I attended the first lien law “Stakeholders’ Meeting” of the North Carolina General Assembly’s 2013 Regular Session.  The purpose of today’s meeting was to give folks in support of and opposition to proposed legislation that would limit the state’s new lien agent notice requirements to one- and two-family dwelling units 30 minutes per side to argue their respective cases.

I spent just under ten minutes of the “pro” side’s time making an argument that I’ve memorialized in the letter attached, below.  To read a larger version of the letter, click the expand button in the lower right-hand corner of the Scribd application.

This issue is still very much ripe for discussion, and so I invite and value your comments.

Once upon a time, Best General Contracting, Inc. hired Able Electric Services Co. to perform the $900,000 electrical scope of work on a library project for a local college.  Having not worked with Able before, and in light of the value of the electrical scope, Best required Able to obtain subcontractor performance & payment bonds for Best’s benefit, agreeing, of course, to reimburse Able for the $13,500 bond premium.  As fate would have it, the library project proved one too many for the not-so-able Able, who ran into cash flow problems, sought bankruptcy protection and abandoned the project.  Best immediately fired off a notice of default letter to Superior Surety and hoped that the claims handling process would match previous, positive experiences with subcontractor sureties and culminate in a quick, fairy-tale resolution to this project setback.

To Best’s surprise, it would not.  

Superior’s claim investigation continued for weeks, subjecting Best to a barrage of complaints from the owner about the project’s stalled status.  Finally, six weeks after Able’s default, Superior identified a potential replacement sub, Reliable Electrical Co., but refused to make a formal tender.  Instead, it suggested that Best hire Reliable directly, since, as Superior asserted, the remaining subcontract balance would be sufficient to cover all electrical completion costs, obviating the need for Superior to remain involved.  Best had its doubts, but when Superior formally exercised the “pay obligee” option under the applicable subcontract performance bond, there wasn’t much Best could do other than hire Reliable and reserve its rights against Superior.  Unfortunately for Best, its worst fears were realized, as the remaining electrical scope exceeded the subcontract balance by $500,000, all of which Best financed, with great difficulty, out-of-pocket.

After completing the project, Best demanded payment of the $500,000 delta from Superior, who rejected the claim on a variety of grounds, none of which Best believed to be legitimate.  Lawyers were hired.  A lawsuit was filed.  Discovery was exchanged, depositions were taken, motions were heard.  Finally, on mediation day, Superior agreed to pay the principal amount of the claim, with Best agreeing to give up its interest and attorneys’ fees claims in order to resolve the litigation and move on.

It’s two months later.  Best has been awarded another big project, and now must make some key decisions about managing the risk of subcontract non-performance by certain trades.  This time around, Best has educated itself on alternative performance guarantee vehicles, including subcontractor default insurance and irrevocable letters of credit.  In short, Best has options, and based on its experience with Superior, all options are on the table.

The Moral of the Story

Construction surety bond claims are not handled in a vacuum.  Both the process and the outcome of claims handling can have ripple effects in the broader risk management marketplace.  Bad experiences can leave lasting impressions on obligees that might influence their future behavior, including whether to seek contract surety bonds at all.  Focusing solely on the claim at hand could result in missing the forest for the trees.

Obligee satisfaction with contract surety bonds was the topic of an hour-long presentation at last week’s Mid-Winter Program sponsored by the ABA’s Tort Trial & Insurance Section, Fidelity and Surety Law Committee, in New York City.  Ms. Lynn Schubert, President of the Surety & Fidelity Association of America, spoke on these issues with the help of pre-recorded video appearances by several bond obligees who had experiences similar to the fictional one Best General Contracting had in our fable above.  Like Best, the obligees in the video appearances developed the perception that some surety companies too readily side with their principals in handling and disputing bond claims.  Also like Best, these obligees came to understand that contract surety bonds are not the only game in town when it comes to managing downstream performance risk on construction projects.

Keeping an Eye on The Big Picture

Like consumers of any other product, potential purchasers of contract surety bonds must believe that they will receive value from the bonds they purchase before plunking down the standard 1-2% premium to obtain them.  How can surety companies and the attorneys who represent them (yours truly included) deliver that value?  In Ms. Schubert’s words, by “doing the right thing.”  In practical terms, that means the following:

• Being proactive.  For example, when a performance bond claim is made, offer to go to the obligee’s office, figure out the details surrounding the default and work on a project/scope recovery plan together.
• Being timely.  While contract defaults are inherently disruptive, sureties can minimize the impact by showing a sense of urgency in the claims handling process and working to get the project/scope back-on-track with as little time lost as possible.
• Being professional.  It’s understandable to be hard on the facts surrounding a contract default, but it rarely makes sense to be hard on the people involved.
• Being accessible.  Effective communication between and among all parties affected by a contract default is key.  Sureties can facilitate effective communication by providing obligees with the contact information for the responsible claims manager and/or legal representative and by responding timely when contacted.
• Being accountable.  That means approving valid claims timely, and then turning to salvage remedies against the principal to mitigate loss.

Most obligees understand that a surety’s investigation of a contract default must be probing and thorough (and for those obligees who may be unfamiliar with the claims process, I recommend this concise brochure published by AGC as a primer).  Indeed, the obligees who appeared by video during Ms. Schubert’s presentation last week acknowledged that many of their respective experiences with surety companies had been excellent.  When disagreements arise, however, the process still matters, and as we all know, one bad apple can spoil the entire barrel.  To remain competitive in the contract performance risk management marketplace, surety companies and the lawyers who represent them should remain mindful of the big picture every time a contract default is investigated.  The claim under consideration is not just that of a bond obligee, but also that of a potential surety bond customer, and poor treatment of that customer isn’t good for business.

Be sure to review NCDOT’s 2012 Standard Specifications before bidding your next highway or bridge contract

I represent a number of highway/heavy contractors, all of whom know that doing business with the North Carolina Department of Transportation (“NCDOT” or the “Department”) requires careful attention to the agency’s “Standard Specifications for Roads and Structures.”  NCDOT’s Standard Specs contain both front-end “General Requirements” (what would be called “General Conditions” on virtually any other public or private construction contract) and back-end standards for all aspects of highway work — from earthwork, pipe culverts, subgrade and asphalt pavements to signing, materials, pavement markings and electronic signalization.

As my highway/heavy clients also know, the NCDOT’s Standard Specs are regularly revised every 4-6 years.  Last year, NCDOT issued the 2012 version of its highway construction bible, updating the 2006 version.  This post focuses on what I consider to be the ten most significant changes to NCDOT’s front-end “General Requirements.”  As you will see below, these ten revisions affect how contractors obtain, perform and make claims on NCDOT work.

1.  Section 102-2(B): Prequalification for Purchase Order Contractors

Contractors and subcontractors wishing to bid NCDOT work have been subject to prequalification under previous versions of the Standard Specs.  Now, and for the first time, “Purchase Order Contractors” will need to submit to NCDOT’s prequalification process.  In accordance with N.C. Gen. Stat. § 136-28.1, a “Purchase Order Contract” or “POC” is an agreement under $1.2 million let by NCDOT’s Division Offices and specific central units, typically for such projects as small construction, maintenance and repair.  If you regularly bid such work, and have not already been placed on the Prequalified Bidders’ List as a Contractor, you will need to seek prequalification.  Otherwise, your POC bid will be considered non-responsive and rejected.

2.  Section 102-14: Licensing Requirements on Federal Aid Projects

The 2012 Standard Specs broaden bidding competition for projects receiving funding, in whole or in part, under the Federal Highway Administration’s Federal Aid Program (Title 23 of the U.S. Code).  Specifically, bidders for Federal Aid Projects who are submitting bids of $30,000 or more are no longer required to be licensed in North Carolina at the time of bidding.  However, a general contracting license must be obtained within 60 days of bid opening; otherwise, the contract may be awarded to another bidder, or all bids rejected.

For state-funded projects, the standard remains as before: where the bid is for $30,000 or more, the prime contractor must have a license from the N.C. Licensing Board for General Contractors at the time of bidding.

3.  Section 102-15: New Ground for Bidder Disqualification

Subsection (T) has been added, making the “[f]ailure to make prompt payment in accordance with Article 109-4″ a ground for disqualification from the Prequalified Bidders’ List.  This provision arguably increases the risk of engaging in payment disputes with downstream subcontractors.

4.  Section 103-2: Consequences of Bid Omissions

Under new subsection 103-2(A)(4)(a), and for state funded projects, if a bidder fails to include a price for mobilization, “the bid shall be deemed irregular and may be rejected.”  The use of “irregular,” as opposed to “non-responsive,” is important here, as it allows — but does not require — NCDOT to reject the bid.

However, under new subsection 103-2(A)(4)(b), and for federally funded projects, the omission of a lump sum price for mobilization, or the omission of any unit bid price, is absolutely fatal: “the bid will be considered nonresponsive and will not be considered for award.”

5.  Section 104-7: Notice Required for Extra Work Performance

New language clarifies that extra work performed without the Engineer’s consent “will be considered incidental to the work of the contract.”  Translation: work not pre-approved by the Engineer will not be treated as an extra, and therefore not compensated.  The best practice is to always seek a supplemental agreement before performing work you consider to be outside the scope of the original undertaking.

6.  Section 107-15: Liability Insurance Provisions Greatly Expanded

This provision is greatly expanded from the 2006 Standard Specs, requiring, among other things, an ACORD-form certificate of insurance evidencing CGL coverage “in the amount of $5,000,000 per occurrence and general aggregate[.]“  The State of North Carolina must be named as an additional insured on the policy.  The enhanced provision also requires contractors to maintain adequate worker’s comp and vehicle liability coverage throughout contract performance.

7.  Section 107-25: Hazmat Handling Provisions Greatly Expanded

The 2012 Standard Specs add four new paragraphs to the previous Hazmat provision.  Among other things, the new language requires contractors to “employ a fully experienced and prequalified geoenvironmental firm to oversee and document the disposal of contaminated material removed from within the project right of way,” increases reporting burdens, establishes requirements regarding where hazardous materials may be disposed, imposes qualifications for on-site personnel responsible for hazardous material removal and requires compliance with a host of federal and state rules and regulations.

8.  Section 108-2: New Progress Schedule Requirements

For the first time, the 2012 Standard Specs outline specific items that must be contained in the contractor’s proposed progress schedule.  These items include: (1) a time scale diagram with major work activities and milestone dates clearly labeled; (2) a cash curve corresponding to the milestones and work activities; and (3) a written narrative explaining the sequence of the work, the controlling operations, intermediate completion dates, milestones, project phasing, anticipated work schedule and estimated resources.  Also important to note: “A detailed Critical Path Method (CPM) schedule shall not be submitted to replace the progress schedule details” now required.

These new scheduling requirements undoubtedly place increased burdens on contractors performing NCDOT work.  But I urge contractors to view the glass as half full, at least from a claim perspective.  I have handled a number of delay/inefficiency claims against NCDOT, and speaking from experience, having detailed as-planned scheduling information is invaluable in establishing the impact of as-built impediments to work progress.  The new scheduling requirements virtually ensure that such detailed as-planned schedules will be created on every project.

9.  109-4(B): Flexibility in Withholding Retainage from Subcontractors

The 2006 Standard Specs permit contractors to withhold 3% retainage on periodic payments to subcontractors.  The 2012 Standard Specs go one step further, allowing the retainage to be increased to a maximum 10% “where the Contractor and any subcontractor have supplied to the Engineer a satisfactorily executed mutual agreement for an increased amount.”  A subcontract containing a clause establishing retainage between 3% and 10% would presumably be sufficient.

10.  109-10: NCDOT Can Issue Final Estimate Before Receipt of Close-Out Documents

Under the 2006 Standard Specs, NCDOT had to wait for a series of documents — including, without limitation, Consent of Surety for final payment and the Contractor’s affidavit certifying that all downstream payment obligations have been met — prior to issuing the final estimate.  No longer.  Under the 2012 Standard Specs, “If the Contractor fails to submit the required documentation within the timeframe specified by the Department, the Department may consider the Contractor to be nonresponsive and may process the final estimate.”

Since the issuance of the final estimate triggers the 60-day deadline for submitting Verified Claims, this new language arguably provides NCDOT with increased flexibility in controlling the timing of the claims process.  If you have claims to assert but receive NCDOT’s final estimate before submitting your close-out documents, contact your lawyer immediately to ensure timely submission of your Verified Claim.

Would snow tonight give rise to excusable delay tomorrow? Image courtesy of The Weather Channel.

Is it just me, or has it been exceedingly gray and wet in Raleigh-Durham, NC so far in 2013?  Heck, forecasters are even calling for 3-6 inches of snow overnight in the Triangle (note to self: pick up milk, bread and other essentials during the lunch break, before the grocery stores shelves are predictably and thoroughly picked over).

The unusually dreary skies around here of late have me thinking about the intersection between the weather and construction delay claims.  Specifically, I’ve been ruminating on this question: when is a contractor’s project delay excused by nasty weather?

Let’s start with a brief refresher on terminology frequently used by construction lawyers in prosecuting and defending delay claims.  As we all know, a construction project might be late for a whole host of reasons, some of which may be the fault of the prime contractor, some of which may entitle the contractor to a time extension only, and some of which may entitle the prime contractor to both a time extension and additional compensation.  Delays that are the responsibility of the contractor are known as “non-excusable delays.”  Delays entitling the contractor to a time extension, but not additional compensation, are known as “excusable delays.”  Delays entitling the contractor to both a time extension and an increase in the contract sum are known as ”compensable delays.”

Now, back to the weather.  While commercial owners and the agents they employ tend to exercise a lot of control over construction projects, they generally can’t control the weather.  And because the weather is beyond the control of owners, it’s difficult, if not impossible, to blame owners when the weather is so bad that work can’t proceed.  Sure, in rare situations, an owner may have the ability to cover all or part of a site to permit work to move forward despite bad weather, and in those rare situations, a contractor’s weather claim might be compensable.  But let’s not complicate things.  Weather delays are rarely compensable, and at least for present purposes, we’re going to assume they are never compensable.

Instead, let’s assume that a very wet weather event, consisting of heavy rains dropping more than an inch of rain a day over the course of three days, hits a two-acre commercial project during placement of footings and foundations.  Let’s further assume that the owner had no reasonable ability to cover the site to allow work to proceed while it was raining cats and dogs.  Finally, let’s assume that the site needs two days to dry out when the sun finally returns, resulting in a total five-day cessation of work activities due to the storm.  Is this five-day delay excusable or non-excusable?

Candidly, I have no ready answer.  But the analysis likely will involve the following steps:

(1)  Check What the Contract Says.

The contract — particularly if it’s with the U.S. Army Corps of Engineers — may expressly define what weather events are considered “normal” for the geographic area where the project is located, or even recite the number of days estimated to be lost due to seasonal weather patterns.  If so, the contractor should have incorporated those days into its baseline schedule, because they will not provide grounds for excusable delay if project work is stalled as a result of such “normal” weather conditions.

Even if the contract contains no set definition of what constitutes “normal” weather, it may include general language regarding how claims for additional time due to bad weather must be proven.  For example, consider Article 15.1.5.2 of the AIA-A201 2007™ General Conditions:

If adverse weather conditions are the basis for a Claim for additional time, such Claim shall be documented by data substantiating that weather conditions were abnormal for the period of time, could not have been reasonably anticipated and had an adverse effect on the scheduled construction.

Or consider Article 6.3.1 of the ConsensusDOCS 200™ Standard Agreement/General Conditions:

Examples of causes beyond the control of the CONTRACTOR include, but are not limited to, the following: … adverse weather conditions not reasonably anticipated.

These terms put the onus on the contractor to prove unusually severe weather not reasonably anticipated at the time of contracting/baseline scheduling.

Which takes us to Step 2.

(2)  Check Historical Weather Data.

This blog post from my friends at Cohen Seglias up north explores weather-related time extension claims and succinctly summarizes how such claims can be proved up:

For a contractor to request a time extension for unusually severe weather he should demonstrate what the weather was that he experienced and compare this with historical weather data normally taken from the National Oceanic and Atmospheric Administration (NOAA) records for that area.  Normally, the weather data comparison is for the preceding five-year period.

The NOAA may charge a small fee to access the weather data needed, but it’s a cost that must be incurred to establish excusable delay as a result of unusually severe weather.

(3) Contact a Construction Attorney Immediately.

If impacted by a weather event, you’ll want to contact your legal representative immediately, for at least three reasons:

• to be sure that all of your contractual notice requirements are met and all of your proof requirements are satisfied;
• to position your claim most favorably in light of published decisions from your particular jurisdiction, as well as from other jurisdictions (such as the Court of Federal Claims and the various Boards of Contract Appeals); and
• to determine if a consultant should be retained to demonstrate how the weather event affected your project’s critical path.

More often than not, weather-related time extension claims will be part of a broader package of delay-based claims submitted at the end of a construction project.  Even if that’s the case, you’ll want to make sure your rights and pertinent evidence are preserved for the claim resolution process.  To that end, make sure notice is sent up the contractual chain timely in accordance with your applicable contract documents, and bust out your smartphones and/or cameras immediately after the storm to thoroughly document field conditions.  Your lawyer will thank you.

I’ve Always Been Told “If It Ain’t Broke, Don’t Fix It.”  When It Comes to the Bankruptcy Fix, What Was “Broke”?

Good question, one that requires a short refresher course in certain aspects of lien law and bankruptcy law to answer.

First, a few lien law notes.  In North Carolina, not all mechanics’ lien rights are created equal.  Parties in direct contractual privity with project owners (i.e., “prime contractors”), such as architects and general contractors, have a statutory right to assert liens against real property.  Downstream participants who are contractually “remote” from owners also have lien rights against real property, but with strings attached.  Although a full treatment of the lien rights available to subs and suppliers is beyond the scope of this post, it is sufficient for present purposes to note that first, second and third tier subcontractors can ONLY assert lien rights against real property if they FIRST serve a “Notice of Claim of Lien Upon Funds” up the contractual chain.  N.C. Gen. Stat. § 44A-17 et seq.

Now, some bankruptcy law notes.  The federal statutes governing bankruptcy law arose from the need to balance the rights of creditors and debtors after a debtor becomes unable to pay its bills.  Rehabilitation of the insolvent debtor — i.e., the debtor’s “fresh start” — became a central tenet of U.S. bankruptcy law.  One of the core ingredients to a debtor’s fresh start is the “automatic stay” provision of the U.S. Bankruptcy Code, which prevents creditors from asserting claims directly against the debtor from the moment a bankruptcy petition is filed.  The stay essentially pushes a pause button on collection efforts against the debtor, so that the bankruptcy court can manage the proceeding in a calm and methodical manner.

Until April 2009, most construction law practitioners presumed that subs and suppliers could serve their notices of claims of lien upon funds up the contractual chain despite the imposition of the automatic stay upon the filing of a bankruptcy petition by a project participant higher up on the chain.  Emphasis on “Until April 2009.”

The Suspense Is Killing Me.  What Happened in April 2009 Giving Rise to the Need for the Bankruptcy Fix?

The U.S. Bankruptcy Court for the Eastern District of North Carolina entered an order in the Chapter 11 bankruptcy of a project owner that voided two post-petition liens upon funds served by first-tier subcontractors.  The decision of Judge Leonard in the Shearin case focused on when the lien claims took legal effect, thereby vesting the claimants’ rights in project funds.  Interpreting various provisions of North Carolina’s mechanics’ lien statutes, Judge Leonard ruled that “no lien arises until it is perfected by giving written notice and made effective by receipt.”  He then held that the post-petition liens upon funds could not be enforced, explaining as follows:

Simply put, an interest in property of the estate against which a lien is asserted must be present pre-petition.  Here, the Bankruptcy Code steps in and freezes rights where they stood at the time the bankruptcy was initiated, before the [l]ien [c]laimants accrued any property interests.

Under this rationale, the post-petition service of a lien upon funds would constitute a violation of the automatic stay.  This outcome was amplified in July 2009 by similar orders of the Eastern District Bankruptcy Court in two separate proceedings: In re: Harrelson Utilities, Inc. and In re: Mammoth Grading, Inc. 

So After April 2009, Subs and Suppliers in North Carolina Had No Ability to Enforce Lien Rights First Asserted Post-Petition?

Not necessarily.  North Carolina has three federal court districts: Eastern, Middle and Western.  This map shows the lines of demarcation for each district.  The trio of decisions in the Shearin-Harrelson-Mammoth cases ONLY affected bankruptcies filed in the Eastern District Bankruptcy Court.  While those cases may have persuaded the bankruptcy judges presiding in the Middle and Western Districts to rule in a similar fashion, those judges would not have been bound by what their colleagues in the Eastern District had decided.

Different Results in Different Federal Judicial Districts Could Have Led to a Lot of Confusion in the Industry, Right?

Bingo.  A “fix” was sought as part of the lien law revisions not only because many believed the holdings of Shearin-Harrelson-Mammoth to be unfair to subs and suppliers, but also because the rules of the game could be entirely different west of Granville, Wake, Harnett, Cumberland and Robeson Counties.

I ‘ve Heard That the Eastern District Bankruptcy Court Reversed Itself in 2012.  Is that True, and If So, Was the Fix Still Necessary?

Yes and yes (at least in my opinion).  Judge Doub, in an order entered March 14, 2012 in the Construction Supervision Services, Inc. bankruptcy proceeding, rejected his colleagues’ earlier analysis of the lien statutes and held that the entitlement of subs and suppliers to project funds “arises upon delivery [of labor and/or material], creating an interest in the right to payment owed to the general contractor, which encompasses the grant of the lien on funds.”

While this course correction came as welcome news to subs and suppliers seeking payment for work performed in the counties comprising the Eastern District of North Carolina in the federal court system, it did nothing to prevent future inconsistent results in the Middle and Western Districts (or yet another reversal in the Eastern District).

How Does the Bankruptcy Fix Work?

Simply and elegantly, actually.  Language has been added to N.C. Gen. Stat. § 44A-18 stating as follows:

A lien upon funds granted under this section arises, attaches, and is effective immediately upon the first furnishing of labor, materials, or rental equipment at the site of the improvement by a subcontractor.

What Do I Have To Do To Take Advantage of the Fix?

Nothing, other than serve your Notice of Claim of Lien Upon Funds in the usual course.  The lien law revisions make it clear that the right to lien project funds exists from day one of your project performance, and that this right remains “inchoate” or only partially in existence until it is “perfected” by the service of a Notice of Claim of Lien Upon Funds in accordance with the form contained in N.C. Gen. Stat. § 44A-19.

When Did The Bankruptcy Fix Take Effect?

January 1, 2013, and it applies to all improvements to real property for which the first permit required to be obtained is obtained on or after that date.

Does the Fix Guarantee That Federal Bankruptcy Courts Will Recognize Post-Petition Liens Upon Funds?

Not necessarily.  Could a bankruptcy court reject a post-petition lien upon funds served this year for a project that began last year, before the fix’s effective date?  Sure, at least in theory.  Might a federal court judge reject the statutory fix as somehow violative of federal bankruptcy law?  Absolutely.

While nothing is ever certain, the bankruptcy fix provides far more certainty than what existed before the lien law revisions were passed and signed into law.  At a minimum, the Fix expresses the Legislature’s intent regarding the effective date of liens upon funds, and federal court judges are likely to find it difficult to circumvent that intent.

Gov. McCrory will have no shortage of highway planning knots to untangle when he arrives at the Executive Mansion.

I recently came across this blog post from The Council of State Governments’ “Knowledge Center” blog.  The post forecasts the 2013 transportation funding challenges and priorities in 20 different states, North Carolina included.  Here’s what the post had to say about what might be expected once former Charlotte Mayor Pat McCrory (R) becomes our governor in January:

The Associated Press recently looked at where incoming Gov. Pat McCrory (the longtime Charlotte Mayor) stands on transportation issues: “Don’t punish cities that must spend lots of money improving interstates, he says.  Develop decades-long construction plans.  Keep politics out of funding road projects and work with the private sector.  And don’t be afraid to try something risky, like the Republican did in 1998 by lobbying for a referendum by voters that raised the local sales tax to help build Charlotte’s first light rail line.”  Transportation advocates in the state are reportedly encouraged that the governor-elect, who championed transportation’s ability to improve the economy as Mayor of Charlotte, could endorse more sustainable transportation revenue sources and win support from legislators.  But, as a Business Journal article pointed out earlier this fall, North Carolina’s gas tax is already among the highest in the nation and while the state has turned to tolling to help finance some projects, they have faced challenges with a couple of toll road projects.

“Challenges with a couple of toll road projects” would be an understatement.  As this blog previously reported earlier this year (see here and here), the Department of Transportation lost a legal battle concerning the Monroe Bypass outside of Charlotte, and political opposition to tolling I-95 to fund its rehabilitation is broad, strong and vociferous.

Still, North Carolina’s motoring public demands safe, non-congested roadways, and North Carolina’s already-high gas tax is insufficient to meet that demand.  Based on Governor-Elect McCrory’s expressed desire to work with the private sector in improving North Carolina’s road network, I suspect movement toward public-private partnerships is inevitable in the years to come.  And if that suspicion is accurate, all of us in the construction industry will need to play a part in ensuring that P3s work for all stakeholders, not just the NCDOT and its concessionaires, but also the contractors, subcontractors and suppliers whose labor and materials will keep North Carolina moving in 2013 and beyond.

By way of brief recap, legislation protecting general contractors from double payment liability on public projects and legislation protecting title insurers from “hidden liens” on private projects made splashy headlines this past summer.  I’ll be delving into the nuts and bolts of those significant changes as this series continues.  This post, however, is dedicated to addressing a less-publicized, but no less substantial, alteration to the lien law that every potential lien claimant will need to bear in mind in 2013, and beyond: the process by which lien rights are “perfected.”

What Does It Mean to “Perfect” Lien Rights?

A prime contractor’s right to assert a mechanic’s lien against the real property being improved arises from and relates back to the date the contractor first furnishes labor or materials at the site of the improvement.  N.C. Gen. Stat. § 44A-10.  The rights of subcontractors and suppliers to assert claims of lien against real property through the lien rights of the prime contractor (so-called “subrogation liens”) also relate back to the prime’s date of first performance.  N.C. Gen. Stat. § 44A-23.  This “relation back” of lien rights has proven to be a powerful weapon in the battle to establish priority in the real property as against other creditors (including lenders, judgment creditors, etc.) when those creditors’ respective interests in the property post-date the contractor’s date of first furnishing.

Between the time of first furnishing and when the potential lien claimant actually files its claim of lien on real property, the claimant’s lien rights are “inchoate.”  That’s just a fancy lawyer term for “partially in existence” or “imperfectly formed.”  The lien right exists, but until the claim of lien is actually filed, the right is not fully formed, or not quite perfect.  “Perfection” is the process by which the partially formed lien right becomes fully in existence, and at least in theory, fully known to the owner, as well as to the rest of the world.

How Are Liens Perfected Under Current Law?

Pursuant to the version of N.C. Gen. Stat. § 44A-12 currently in effect as of the date of this post, claims of lien on real property are perfected by filing such claims in the office of the clerk of the superior court in each county where the real property subject to the claim of lien is located.  This may come as a surprise to some, but under current law, there is no requirement that the claim of lien actually be served upon the project owner, or anyone else for that matter.  Rather, the owner — and the rest of the world — is put on constructive, if not actual, knowledge of a claimant’s lien rights at the moment the clerk dockets the claim of lien.   Nothing more is required of the lien claimant to perfect its claim of lien under existing law.  But that’s a-changin’.

How Does the 2012 Lien Law Legislation Impact Perfection of Liens?

Here’s where you really need to be paying attention, potential lien claimants (and their attorneys).  Effective for all private construction projects for which the initial permit is issued January 1, 2013 or later, you will have to jump through an additional hoop to perfect your lien rights.  You will need to serve the claim of lien up the contractual chain.

Specifically, prime contractors (i.e., those having a direct contract with the owner of real property, including architects of record, GC’s, construction managers at-risk, design-builders, etc.) will need to serve the owner of the real property subject to the improvement.  Likewise, first-tier subcontractors and more remote subs/suppliers will need to serve the owner, and will also need to serve the prime contractor through whom subrogated lien rights are being asserted.  Assuming the statutory claim of lien form is followed, the names and address of these entities should be included in paragraph (2) of the claim of lien, just under the name and address of the lien claimant in paragraph (1).  The statutory form can be found at N.C. Gen. Stat. § 44A-12.

Concerned about finding the proper addresses for service?  The service address for the owner of the real property should be listed on the building permit and in the county tax rolls.  Additionally, and in the event the owner and/or contractor are incorporated entities, the addresses of their respective registered agents for service can be found through the Corporations Division of the Department of the Secretary of State.

What Magic Language Should My Claim of Lien on Real Property Contain?

The claim of lien should include a certificate of service that states something like the following:

I hereby certify that I have served the parties listed in paragraph (2) above in accordance with the requirements of G.S. § 44A-11.

How Do I Effect Service of My Claim of Lien on Real Property?

At the same time the claim of lien is filed with the appropriate clerk(s) of superior court in all counties where the improvement is located, the lien claimant should also be sure the owner and (in the case of subcontractor liens) the prime contractor receive a service copy of the claim of lien.  Service can be effectuated by personal delivery, the U.S. Postal Service or overnight delivery service, and will be considered complete upon delivery.  While no receipt will be required, I’ll probably be advising my clients to serve by certified mail, return receipt requested, and to save their green cards — just to be safe, and to have evidence that service was, in fact, effectuated, should such evidence ever be needed to rebut a claim that service was never made.

Do I Have to Serve My Claim of Lien on Real Property on the Same Day That I File It?

Not necessarily, but beware: both filing AND service will need to be effectuated within 120 days of the prime contractor’s last performance.  My view is the best practice will be to get in the habit of sending a service copy up the contractual chain on the same day you file the original claim of lien with the appropriate clerk(s).

What Happens If I Fail To Serve My Claim of Lien?

Bad things, my friend, bad things.  Failure to serve the claim of lien under the new regime will be fatal to enforcing your lien rights in court.  Stated another way: you can kiss your lien rights goodbye if you don’t follow the new service requirements.  Given that the old regime (i.e., no service required) will be in place for projects commencing before 1/1/2013 and the new regime (i.e., service required) will be in place for projects commencing on or after 1/1/2013, contacting an experienced construction law practitioner prior to asserting your lien rights may be your best move.

Our remarks focused on two of the tools sureties use to minimize loss after satisfying claims made under payment and performance bonds.  One of those tools, equitable subrogation, allows the surety to step into the shoes and assert the rights of those entities to whom or on whose behalf the surety has performed or made payment.  That means after it performs its bond obligations, a surety becomes “subrogated” to the owner’s right to apply contract funds to completion costs, to the bond principal’s right to recover against poor-performing and/or late-performing subcontractors, and to the subs’ and suppliers’ rights to payment.  Since the courts have held that the surety’s equitable rights trump the rights of bankruptcy trustees, lenders and taxing authorities, equitable subrogation is undoubtedly the most powerful weapon in the surety’s salvage arsenal.

That’s MOST powerful.  Not ALL powerful.

On occasion, the general indemnity agreement (“GIA”) might provide a more suitable salvage tool than equitable subrogation.  Mark and I focused our attention on the GIA’s assignment clause, which typically provides that the moment the surety receives claims under a contract bond, the bond principal assigns to the surety all of the principal’s interest in the contract funds due or to become due; all project materials, supplies, equipment and plant; all subcontracts; and all of the principal’s claims against other project participants.  Such an assignment can serve as a powerful supplement to the surety’s assertion of its equitable subrogation rights.

Mark and my presentation fleshed out the pro’s and con’s of these two salvage tools and highlighted a number of judicial decisions from the last 15-20 years that illustrate how the assignment clause has increasingly found favor with the courts.  For a taste of our discussion, I invite you to thumb through the PowerPoint presentation above.

Photo credit: tvland.com

The John Conner Construction, Inc. v. Grandfather Holding Co., Inc. decision is significant to the construction industry because it limits the reach of the term “Owner” as that term is used in North Carolina’s mechanic’s lien statutes.  Since there was one dissenting vote from the three-judge panel, however, the case is likely to be reviewed by the N.C. Supreme Court, which could elect to expand who qualifies as an “Owner” for the purposes of the lien law.

A full exploration of the facts, holding, dissent and practical implications of the John Conner Construction decision follows:

FACTS:

John Conner Construction, R&G Construction Co. and Eggers Construction Co. (together, the “Plaintiffs”) entered into an oral “handshake deal” with Grandfather Holding Company, LLC (“GHC”) in 2004 for the furnishing of all labor and materials required for infrastructure improvements needed to develop nearly 42 acres of land between Banner Elk and Linville.  Plaintiffs began performing the work before GHC purchased the land in October 2005.  Mountain Community Bank (the “Bank”) financed the purchase and development of the property, and GHC executed a deed of trust on the land in favor of the Bank to secure the loan.

For reasons that are not apparent from the COA’s opinion, Plaintiffs waited years before submitting a bill to GHC, finally requesting a payment of approximately $1.34 million in October 2007.  GHC’s president sought a draw from the Bank, but was informed that all but $262,000 of the loan balance had been expended.  A partial payment in that amount was made to Plaintiffs, leaving over $1 million owed.

The Bank began foreclosure proceedings on the property in November 2008 and acquired title to the land shortly thereafter.  Plaintiffs filed a $1.77 million claim of lien against the property in January 2009 and sued shortly thereafter, including the Bank in the suit as GHC’s successor-in-interest to the land.  The claim of lien upon which the suit was based alleged that materials were first furnished in May 2004.  Plaintiffs’ complaint alleged that formal land purchase negotiations did not begin between GHC and the prior owner until June 2005, ultimately culminating in an October 2005 purchase.

After a period of procedural maneuvering, the Bank filed a motion to dismiss Plaintiffs’ complaint in December 2010 for failure to state a valid lien claim.  That motion was granted by the trial court in February 2011, resulting in the dismissal of all claims Plaintiffs had asserted against the Bank and against the subject property.  Plaintiffs appealed.

COA’s ANALYSIS and RULING:

The appeal turned on whether Plaintiffs had a statutory right to file a claim of lien against the subject property under the facts and circumstances Plaintiffs had alleged in their claim of lien and complaint.  The COA held that Plaintiffs had no such right and affirmed the trial court’s dismissal of the claims against the Bank and the property.

The COA began its analysis considering the definition of “Owner” in the mechanic’s lien statutes: a “person who has an interest in the real property improved and for whom an improvement is made and who ordered the improvement to be made.”  N.C. Gen. Stat. § 44A-7(3).  The Court then noted it had previously held that a person who had entered into a purchase and sale agreement, but who hadn’t yet acquired legal possession of the land subject to the P&S, possessed a sufficient equitable interest to qualify as an “owner” under the lien law.  Carolina Builders Corp. v. Howard-Veasey Homes, Inc., 72 N.C. App. 224, 324 S.E.2d 626 (1985).

Turning to the complaint’s allegations, which the COA treated as admissions, the Court noted that GHC had no interest — legal or equitable — in the subject property at the time materials were first furnished in May 2004.  These facts effectively meant that Plaintiffs did not have a contract with the “Owner” of the property, as that term is defined in the lien statutes and interpreted by the Carolina Builders decision; as a result, Plaintiffs could not maintain a mechanic’s lien action against the property.  Addressing Carolina Builders directly, the COA stated that it was declining Plaintiffs’ “implicit invitation to extend the holding of Carolina Builders to cases in which the party against whom a lien is sought was not yet under a contract for sale at the time an alleged contract for work/materials was entered into.”

THE DISSENT

One of the three COA judges to consider the John Conner Construction case, Judge Robert N. Hunter, was troubled that GHC would not be considered an “Owner” in light of the fact that it acquired a legal interest in the property during the course of Plaintiffs’ performance.  Judge Hunter therefore wrote a dissenting opinion “in the hope that our Supreme Court will clarify” that a “subsequently acquired interest” in real property would support a mechanic’s lien “even where no enforceable interest existed when the contract was made or [when] the work commenced.”  Judge Hunter further wrote that the majority opinion “produces a result contrary to the remedial nature of the lien statute,” calling this result “inequitable” and “particularly troublesome” in light of the constitutional protections afforded mechanic’s liens under Article X of the North Carolina Constitution.

Should Plaintiffs desire further review of the case at the N.C. Supreme Court, the very existence of Judge Hunter’s dissent provides them with a right to such review.  Time will tell if Plaintiffs decide to exercise that right.

PRACTICAL IMPLICATIONS

In the interim, the COA’s opinion in John Conner Construction is the “law of the land,” and contractors may want to exercise a good deal of caution before entering into construction contracts with persons or entities lacking either a legal or equitable interest in the real property to be improved.  Unless the N.C. Supreme Court reverses John Conner Construction – or the General Assembly modifies the definition of “Owner” — the lien law will provide no payment security to contractors in such instances.

Accordingly, and when presented with a contracting opportunity for which there may be no statutory payment security, contractors should consider a range of financial protections, including without limitation the following:

• No matter how well you know the owner, your financial risk is almost always too great to rely on a handshake deal.  Always insist on a written contract that includes terms requiring payment on a periodic basis.  Any subsequent failure by the owner to honor a contractually compliant periodic payment request would constitute a breach of contract entitling you to suspend or terminate performance, minimizing your loss exposure.
• Try to negotiate for contract terms requiring the owner to disclose information regarding its financial condition, and make the disclosure obligation a continuing one until final payment is made.
• Try to negotiate for an alternative security mechanism, such as a personal guarantee.  While I’d rather have a first-priority mechanic’s lien over a personal guarantee every day of the week and twice on Sunday, the security of a personal guarantee is certainly better than no security at all.