Can a Contingent Payment Provision Affect a Construction Lien Claim in Washington?

Bart Reed | Stoel Rives LLP | April 24, 2018

During Seattle’s current construction boom, general contractors and subcontractors may be concentrating more on finalizing work on their projects than on worrying about the niceties of their construction contract documents. It is no less prudent now, however, for the parties to remain aware of their contractual rights and responsibilities—especially those tied to payment.  One payment term commonly contained in subcontract agreements is the contingent payment provision, which, depending on its terms, may pose an interesting challenge to construction lien rights.

Contingent payment provisions (e.g., “pay-if-paid” or “pay-when-paid” clauses) are frequently inserted in subcontract agreements. The hallmark of pay-if-paid clauses is usually “condition precedent” language, where the general contractor and subcontractor expressly agree that the general contractor’s receipt of payment from the owner is a condition precedent to payment by the general contractor to the subcontractor.  Under this clause, the subcontractor assumes the risk of non-payment by the owner.  On the other hand, pay-when-paid clauses have been interpreted to delay the subcontractor’s entitlement to payment until the owner pays, or for some reasonable time if the owner does not pay.

It is unclear whether Washington courts would enforce a pay-if-paid clause, but pay-when-paid clauses have been enforced. See Amelco Elec. v. Donald M. Drake Co., 20 Wn. App. 899, 902-03, 583 P.2d 648 (1978) (contract specifying that the subcontractor would receive payment only “to the extent that the Contractor has received payment . . . from Owner” did not create a condition precedent to the subcontractor’s payment; rather, it postponed payment for a reasonable period of time after the work was completed, during which the general contractor was afforded an opportunity to obtain funds from the owner to pay the subcontractor).

The challenge to construction lien rights could arise as follows: faced with a lien claim filed by a subcontractor, a general contractor may argue: “A lien must be supported by an underlying debt, and there is no debt here. You (sub) have no right to be paid by me, because I have not yet been paid by the owner.” Recall that a lien claim must be filed within 90 days of the claimant’s last work.  If the “pay-when-paid” defense is accepted, it could deprive the subcontractor of its lien rights (if the owner fails to pay the general within 90 days of the sub’s last work).  Should the general contractor be able to make this defense?

The answer is probably no under current Washington legal authority, although a Washington appellate court has yet to rule on the issue. Although general contractors may be pressured to exert such a defense (emanating from possible contractual duties owed to the owner to keep the property lien-free), the lien statutes in Washington are remedial in nature and liberally construed to safeguard the payment rights of those furnishing lienable improvements to real property. RCW 60.04.021.

A general contractor (as a “construction agent” of the owner) may assert defenses to the underlying debt—for example, that the claimed work was not done, or that the claimant has been paid. But, if the claimant has furnished labor, material, equipment or services to improve the property for which it has not been paid, a court will probably look for ways to permit the lien claim to go forward.

One possible approach would be to say that, when lien rights are in question, it is not “reasonable” for a general contractor to delay payment to a subcontractor more than 90 days, so the debt will always mature, as it were, in time for the lien filing. Another approach is to permit the lien filing but to stay any foreclosure lawsuit until a “reasonable” time for payment (as construed by the court) has expired.  A third approach is to interpret the lien claim statute, RCW 60.04.091, which requires the claimant to list the “person indebted to the claimant,” to be satisfied by listing the general contractor, even if the general’s obligation to pay has not yet matured.  Any of these approaches would, to some extent, enforce the pay-when-paid clause without stripping away the subcontractor’s lien rights.

It is unclear how a Washington court would handle the collision of two established principles, the enforcement of contracts and the protection of lien rights. Each case will depend on its unique set of facts and whether the general contractor seeks to rely on a pay-if-paid or a pay-when-paid clause.  As long as this uncertainty remains, general contractors should be wary of relying on contingent payment clauses to challenge lien rights.

When Does a Mechanics’ Lien Effect?

Kent B. Scott | Babcock Scott & Babcock | March 30, 2018

The Utah Mechanic’s Liens Act needed some clarification on when exactly a mechanic’s lien goes into effect. That clarification came in February 2015 from the Court of Appeals of Utah. In the case Pentalon Construction, Inc. v. Rymark Properties, LLC the court ruled that “nearly completed excavation constitutes ‘commencement’ under the Act because the excavation was sufficient ‘to put a prudent lender on notice that lienable work was under way.”[1]

What this means for contractors is that to make sure a mechanic’s lien has priority over other liens or mortgages, they need to file their lien with the recorders office and construction needs to be underway on the jobsite to a point where a “reasonable observer” can tell that a mechanic’s lien is sure to be in effect.

The court found that there are easy ways for a jobsite to pass the “work started” test. For example having large piles of dirt from excavation activities helps people know that a construction project is under way.[2] Heavy machinery operating on the jobsite also demonstrates the beginning of a construction project.[3] Adding in construction materials to the excavated portions of the jobsite, and a nearly completed foundation are the final examples from the court that place observers on notice that work has started.[4]

Contractors need to know that two previous rulings regarding preparatory work for a jobsite is still in effect. The ruling in Ketchum, Konkel, Barrett, Nickel & Austin v. Heritage Mountain Development Co. states that architectural work and other site preparation such as surveying, staking, and soil sampling does not always put the “reasonable observer” on notice that work has started on a jobsite.[5]

Similarly, “wetlands delineations, groundwater monitoring, geotechnical testing, and irrigation work” does not place a reasonable observer on notice because the work should demonstrate “impending or ongoing work.”[6]

The important thing to remember is that the more obvious it is to a reasonable observer that construction has started on a jobsite, the more likely that a filed mechanic’s lien has taken effect. A jobsite’s almost completed foundation, large piles of dirt accompanied by heavy machinery, and construction materials onsite provides more than adequate notice of a mechanic’s lien that is in effect.

[1] Pentalon Const., Inc. v. Rymark Properties, LLC, 344 P.3d 180, 186, 2015 UT App 29, ¶ 19 (Utah App., 2015).

[2] Id. at 183.

[3] Id.

[4] Id.

[5] Ketchum, Konkel, Barrett, Nickel & Austin v. Heritage Mountain Development Co., 784 P.2d 1217, 1228 (Utah App., 1989).

[6] EDSA/Cloward, LLC v. Klibanoff, 192 P.3d 296, 300, 2008 UT App 284, ¶ 10 (Utah App., 2008).

The General Assembly Seems Ready to Provide Some Consistency in Mechanic’s Lien Waiver

Christopher G. Hill | Construction Law Musings | March 5, 2018

Back in 2015, the Virginia General Assembly amended the mechanic’s lien statute (Va. Code 43-3) here in Virginia to preclude any contractual provision that diminishes a subcontractor or supplier’s “lien rights in a contract in advance of furnishing any labor, services, or materials.” However, this amendment was only applicable to subcontractors and suppliers. For political and other reasons, general contractors in Virginia were left out of this change. This omission by the legislature put Virginia general contractors in the position of potentially being forced by project owners to waive their mechanic’s lien rights without the ability to run that risk down stream to their subcontractors and suppliers.

A recent bill enrolled during this legislative session, HB823, provides some remedy to this inconsistency. This bill (a .pdf of which can be obtained here) amends Virginia Code 43-3 and Virginia Code 43-21 to effectively preclude full contractual waiver of lien rights by general contractors with one caveat. That caveat is that with the amendment to 43-21 relating to priority of liens the general assembly has specifically authorized pre or post provision of labor or materials subordination of general contractor mechanic’s liens to any deed of trust on the property in question. In short, general contractors got at least partial relief from the contractual bind that the previous legislation put them in.

Of course this begs the question of whether subcontractors and suppliers can be forced to subordinate their lien rights given the above-quoted language. Would doing so constitute diminishing those rights through the loss of priority? In the past few years, I haven’t seen a case that answers this question. As always, I recommend that you review the statutes yourself, preferably with the advice of an experienced Virginia construction attorney.

A Promise to Pay Doesn’t Extend Lien Deadlines

Stan Martin | Commonsense Construction Law | January 24, 2018

Mechanic’s lien rights arise from the laws of each state; there is no common-law right to unilaterally lien someone else’s property. As such, compliance with statutory requirements and deadlines is paramount. Thus, when an owner promised to pay a sub, and the sub elected not to pursue lien rights based on that promise, the sub lost out on its lien when it missed the statutory deadlines.

This case is in Massachusetts, but it is likely the same outcome would result in all other states. Equitable theories that might apply in other circumstances (e.g., equitable tolling of statutes of limitation when one forebears based on promises from another) do not apply when the underlying right is based on compliance with lien law standards and deadlines.

The sub was owed $196,500. It took the first two steps (out of three) under the Massachusetts lien law, to secure a mechanic’s lien. The third step was to file a lawsuit, but the sub didn’t file based on what it claimed were promises of payment. In the meantime, the deadline to file a lawsuit (90 days after the second step) came and went. When no payment was made, the sub tried to resurrect its lien rights by taking steps 1 and 2 again, but by now the deadline for those steps had passed under the lien law.

The sub argued that the lien law deadlines should be equitably extended, but the trial court, and then the Appeals Court, disagreed. “A mechanic’s lien is not a common-law right but a creature of statute, which ‘compels strict compliance in order to obtain relief.’” The sub’s lien rights had lapsed when the deadlines passed, regardless of any promises of payment that may have been made.

The lesson? Ignore lien law deadlines at your peril. The case is D5 Iron Works v. Danvers Fish & Game Club, 2018 Mass. App. Unpub. LEXIS 60 (Jan. 22, 2018).

Washington Supreme Court Upholds Rule That Property Owner and General Contractor Are Not Indispensable Parties in a Lien Foreclosure Action Against the Surety of the Lien Release Bond

Jennifer McMillan Beyerlein | Lane Powell | January 18, 2018

Today, the Washington Supreme Court has clarified any misunderstanding about the necessary parties in a mechanic’s lien foreclosure action when a lien release bond has been posted. In Inland Empire Dry Wall Supply Co. v. Western Surety Co., the Court upheld a divided Court of Appeals by allowing a lien foreclosure action brought by a material supplier to proceed solely against the surety securing the lien release bond. Inland Empire Dry Wall Supply Company alleged that it was not paid for drywall supplied to an apartment complex in Richland, Washington. Inland Empire filed a pre-claim notice and a mechanic’s lien against the property. The general contractor, Fowler General Construction, obtained a lien release bond from Western Surety Company, which identified Fowler as the “Principal” and Western Surety as the “Surety.” Ultimately, Inland Empire filed a lien foreclosure action solely against Western Surety seeking to foreclose its lien claim against bond.

Western Surety sought dismissal of the action, arguing that Inland Empire failed to properly include Fowler as the principal on the bond as required under the mechanic’s lien statute. The trial court granted summary judgment against Inland Empire, finding that the material supplier was required by statute to bring its lien foreclosure action against both the surety and the purchaser of the bond, Fowler. The trial court held that because the bond was the subject of the claim of lien, in place of the apartment complex, that both Fowler and Western Surety were the “owners” of the bond — making both indispensable parties to the lien foreclosure action. Division III of the Court of Appeals, in a split decision, disagreed last January, holding that the only necessary party to a lien foreclosure action involving a lien release bond was the surety.

In reviewing the statutory history of mechanic’s liens in Washington, the Supreme Court noted that the owner of the real property is required to be named in actions where no lien release bond is filed. The Court noted that this makes sense given that forfeiture of the property would be required in order to enforce payment of amounts owed under a mechanic’s lien. When a lien release bond is obtained, however, the real property is released from the lien and becomes “unreachable” and the bond becomes the security for enforcement of payment. In strictly reading the mechanic’s lien statutes, the Court found that neither the real property owner nor the entity who purchased the lien release bond are necessary parties in any action to enforce the lien against the surety who posted the lien release bond. This is because the surety is substituted for the real property owner in the eyes of the mechanic’s lien statutes for purposes of enforcement.

Practice Tip: In dicta, the Court noted that when a property owner or other party to a lien foreclosure action obtains a lien release bond after a lien foreclosure action is initiated, the lien claimant should amend its pleadings to specifically seek to foreclose on the lien release bond to avoid a situation where there is a judgment in favor of the lien claimant, but no security to enforce the judgment.