New Mechanic’s Lien Opinion Shows Need for Additional Care When Drafting Construction Contracts

Mark Bloom, Laurel LaMontagne and Andrew Ross | Arent Fox

Those in the DC metro area construction industry should take heed of a recent District of Columbia Court of Appeals opinion that sheds additional light on the District’s mechanic’s lien statute – King Carpentry Inc. v. 1345 K Street LLC, ADI Construction of Virginia, LLC, and Great American Insurance Company. It demonstrates the importance of carefully reviewing forum selection clauses.

The Project

The property owner and developer, 1345 King Street SE, hired ADI Construction of Virginia (ADI) as its general contractor on a condominium project. ADI, in turn, hired King Carpentry as one of its subcontractors. Their subcontract contained a forum selection clause stating that the parties “consent[ed] to personal jurisdiction and venue, for any action arising out of breach or threatened breach of this Agreement in the Circuit Court in and for Fairfax County, Virginia.”  

The Mechanic’s Lien

Due to a payment dispute, King Carpentry filed a Notice of Mechanic’s Lien against the Project with the DC Recorder of Deeds pursuant to DC Code § 40-303.03. In response, 1345 K Street and ADI filed a consent petition to replace the lien with an undertaking and bond, pursuant to DC Code § 40-303.17.  

The Litigation

King Carpentry subsequently started litigation in the Superior Court of the District of Columbia (1) for breach of contract against ADI and (2) to enforce the mechanic’s lien against the undertaking as to ADI, 1345 K Street, and the surety.  

In response, ADI filed a motion to dismiss the complaint, arguing that (1) Fairfax County, Virginia was the proper forum for the contract claim and that (2) King Carpentry had failed to follow the procedural requirements of the lien statute by failing to file a notice of lis pendens within ten days of filing suit under DC Code § 40-303.13.  

The trial court agreed with ADI and dismissed the complaint.  

The Appeal

On appeal, King Carpentry argued that the trial court erred in determining that (1) the forum selection clause was mandatory rather than permissive, and that (2) a lis pendens was necessary even where a mechanic’s lien has been replaced by an undertaking and bond.  

The District of Columbia Court of Appeals agreed, noting that the forum selection clause did not state that litigation “shall” be brought in Fairfax County, but rather that the parties “consented to” venue in Fairfax County. This language was permissive and not mandatory – it did not preclude litigation in other venues.  

The Court of Appeals also determined that King Carpentry was not required to file a notice of lis pendens – at the time it filed its complaint, it was not a “person with a lien” as referenced in DC Code § 40-303.13(a)(1)(B). The lien had already been replaced by an undertaking and bond, transforming the cause of action from a proceeding against the property to a proceeding against the property owner and surety.

Considerations

This case highlights a few important considerations for property owners and general contractors.

1. Be careful in drafting a forum selection clause. If you want to limit suit to a certain venue, ensure the language is mandatory rather than permissive.

2. Owners need to think beyond the general contract with the general contractor and consider whether to require the general contractor to include a forum selection clause in its subcontract that mirrors any forum selection clause in the general contract. Had the forum selection clause in the King Carpentry case been mandatory, the subcontractor would have been precluded from bringing the complaint related to the mechanic’s lien against the owner (which must be filed in the county in which the property is located) and the complaint about a breach of contract against the general contractor (which would have been Fairfax County, VA) in the same court.

3. Evaluate litigation strategy before obtaining an undertaking and bond. Some subcontractors are not aware of the need to file a lis pendens within 10 days of filing suit. Owners can use the failure to obtain a lis pendens as a basis for seeking dismissal of an action on a mechanic’s lien. By replacing a lien with an undertaking and bond prior to suit, the subcontractor is no longer required to file a lis pendens.  

Construction Conversations around the Licensing Board, Liens, and the Supply Chain

Merrill Jones | Ward and Smith

My colleagues and I recently provided key updates on supply chain disruption, liens, and licensing boards during the firm’s 2021 Construction Conversations Webinar.

In the Rapid-Fire Legal Update session, we covered a variety of topics relevant to the construction industry, including:

  • Dealing with the North Carolina Licensing Board for General Contractors
  • Ongoing supply chain issues
  • Lien law best practices
  • Economic loss rule

This article summarizes the main takeaways.

Licensing Boards

My law partner, Evan Musselwhite, a construction litigator who advises contractors, subcontractors, owners, and design professionals about the construction and development process, started the session with important considerations for general contractors dealing with a licensing board complaint. Before delving into these issues, Musselwhite provided an overview of the intricacies of when a general contractor’s license is required and the importance of strictly following licensing regulations.

Aside from the Board having the ability to restrict, suspend or revoke a license, Musselwhite said another negative outcome could result from failing to pay careful attention to licensing rules and regulations.

A contract is generally unenforceable by the general contractor if it does not have the required license. Strict compliance with the licensing rules and regulations, not substantial compliance, is the rule.

“The courts here consider that an illegal contract,” said Musselwhite. “That means if you complete the entire project and do all the work perfectly, that owner doesn’t have to pay you, and you can’t go to the courts to enforce that contract to try to get paid.”

Some view this as a very harsh result, especially from a collectability standpoint. “A lot of times, this is a big windfall for owners, but that is just the way the courts have interpreted these regulations because they feel they deal with the health and safety of the public,” Musselwhite explained.

The question of who actually needs a license is more complex than it seems. “Every corporation, partnership, and LLC has to have its own license in its own name if it’s practicing general contracting within the state,” noted Musselwhite.

He added that, in general, each member of a joint venture has to have a license. “Sometimes there can be confusion over an unlicensed entity wanting to team up with a licensed contractor to do a project under a joint venture and thinking if we team up with them and they are licensed, then we are OK, but that is not how it works,” said Musselwhite. To avoid disciplinary action, each joint venture member would require a license, or the joint venture itself could obtain its own license.

As far as what the Board is looking for when it gets a complaint, the bases for disciplinary action include:

  • Unauthorized practice of general contracting
  • Fraud or deceit in obtaining a license
  • Gross negligence, incompetency, or misconduct in the practice of the profession
  • Willful violation of licensing statutes

Musselwhite explained that it is important to cooperate with the Board when faced with a complaint.  “It’s important to be proactive about a complaint; keep and maintain all records, and don’t try to defend an indefensible position,” advises Musselwhite. “One of the worst things to do is to try to cover something up or make a misrepresentation to the Board, as it’s much more likely to have a harsh consequence.” 

Honesty is the best policy when dealing with the North Carolina Licensing Board for General Contractors.  Some issues may have originated from a simple mistake or oversight that can be explained to the Board. Musselwhite explains:  “The Board wants acknowledgment of a mistake, if there was one, someone to take responsibility for it, and what steps you will take to ensure that the issue doesn’t happen again.”

Supply Chain Issues

As a business attorney with decades of experience representing contractors, design professionals, and project owners, I have increasingly fielded a multitude of questions about dealing with supply chain disruption in recent months. As noted, “[t]he global pandemic has caused shortages of materials, components, and equipment at a level most of us have never seen,  and this has caused rapidly escalating prices, unpredictable delivery times and ultimately, more risk for contractors and subcontractors.”

The mindset of doing business as usual is simply not going to work anymore. To help contractors and subcontractors adapt to the modern business environment, I provided a number of steps for minimizing risk, including:

  • Communicate early and often about supply chain issues, set clear expectations
  • Provide for price increases in the contract based on market changes
  • Use allowances for volatile materials that could fluctuate in price
  • Work with the owner(s) to buy materials in advance
  • Include material shortage as a reason for additional time or delays

“If you can educate all the parties, they may be convinced to do things differently. We need to recognize the market we’re in and create specific carve-outs in contracts for problems related to epidemics, pandemics, and material shortages.”

Lien Law Update

Luke Tompkins, a commercial litigator, provided guidance and best practices for navigating lien laws.

Tompkins noted that there have been no significant changes to North Carolina lien laws since 2013 when lien agent requirements were added. He advised contractors to post building permits and lien agent information conspicuously on the job site.

Also, contractors and subcontractors should serve a notice to the lien agent no later than 15 days after furnishing labor or material at the job site. Failing to do so shifts the priority of any lien claims from the date of first furnishing to the date where the lien is actually filed and perfected.

“This can have vast consequences because if other subcontractors do this process correctly and get everything in place before you file your lien, and you didn’t serve the notice to the lien agent, you could lose your ability to recover,” Tompkins explained.

To be safe, Tompkins recommended that, “Every time you begin work on a project, get the lien agent information, serve that notice to the lien agent and maintain proof that you served the lien agent by using certified mail or another method of service by which you can show receipt of service.”

Tompkins also strongly suggests that contractors post and file a notice of contract to guard against the threat of double payment. On the other hand, subcontractors should check to see if a notice of contract has been posted on the job site and, if so, should serve the contractor with a notice of subcontract to preserve their right to file a lien on real property.

Lastly, Tompkins emphasized the importance of asserting lien claims in a timely fashion. A lien on real property must be filed within 120 days of the last furnishing of work or materials and enforced by legal action within 180 days of the last furnishing. Waiting until the last minute to file and enforce your lien on real property can result in a loss of your claim. Likewise, it is paramount to give notice of a claim of lien on funds as soon as it becomes clear that a payment is late and not forthcoming.

Economic Loss Rule

Bill Durr, a construction litigator, weighed in on a recent North Carolina Supreme Court decision addressing the application of the economic loss rule.

In the case, Crescent University City Venture, LLC v. Trussway Manufacturing, Inc., a commercial property owner brought a lawsuit against a general contractor and the manufacturer of the trusses used in the project.

“As is often the case, this dispute involved a property owner looking for as many deep pockets as they can possibly find,” said Durr.

The owner sought to make a direct claim against the truss manufacturer, alleging the trusses were negligently manufactured.  The North Carolina Supreme Court affirmed the ruling from the Business Court, holding that the only means of recovery would be against the general contractor since there was no contract between the owner and manufacturer.

“This decision clarifies the applicability of the economic loss rule in the context of commercial construction projects, especially where the property owner is an experienced real estate developer,” added Durr.

Questions and Answers

At the close of the webinar, the moderator opened the floor for questions. One attendee wanted to know:  “Can I fire an employee for refusing to wear a mask while working?”

“Yes, if you go through the right process,” said Emily Massey, a labor and employment attorney. “The first question to ask is, ‘Is this for a medical or religious accommodation?’ We have seen terminations happen: the key is to engage legal counsel, have multiple conversations, and document the process.”

Another attendee asked, “Does the economic loss rule apply to single-family homes?”

“I think you can argue it does apply,” said Durr. “I think the courts would look at whether there is a right of recovery in the contract. Courts will take a firmer view in regards to a commercial contract, but they may give the benefit of the doubt to a homeowner with less experience negotiating contract terms.”

So You Filed A Mechanics Lien, Now What?

Kirk Rodby | The Green Law Group

If you have recorded a mechanics lien in California, there are some important things you should know about the process moving forward.

Mechanics Liens Expire in 90 Days

To begin with, your lien will expire in 90 days from the date of recording. After that, your lien becomes null and void, completely unenforceable, and must be removed. You must either file a suit to foreclose the lien, get an extension, or release within those 90 days.

An extension may be obtained through a signed and notarized credit agreement with the owner, which must be recorded within the original 90-day window. The extension may be for up to 90 days, but in no case will extend beyond one year from completion of the project. No lawsuit can be filed during the extension, however. The best practice is to consult an attorney soon after recording the lien, and to pursue foreclosure (if necessary) well before the 90-day limit. During COVID-19, it is recommended that you record within 45 days of completion as county clerks have a 6-week backlog of pending documents.

You Must Record a Lien Release

In the event that you are paid or choose not to follow through with a suit to foreclose, a release of the lien must be recorded. Failing to do so will subject the lien claimant to liability for attorney fees and costs to remove the stale lien.

Recording Additional Liens

It may be possible to record additional liens if the window to record a lien is still open when the period to foreclose has elapsed. As those with direct contracts with the owner cannot record a lien until the project is completed (or the contract is breached), the 90-day window for foreclosure will always extend at least as far as the 90-day window to record the lien. No additional liens will be possible beyond that point.

Subcontractors and suppliers, on the other hand, can record a lien whenever their portion of the work is done (or earlier if the contract is terminated). Depending on how long the project as a whole runs, this leaves open the possibility that there will still be time to record additional liens if the original lien expires. Any subcontractor or supplier finishing their work towards the end of the completion of the project a whole should be aware that the owner can reduce the amount of time to record a lien post-completion. The owner can file a notice of completion or cessation, which will leave the subcontractor or supplier with only 30 days from that point.

If an additional lien is to be recorded, any preceding liens should be released with the indication that the underlying obligation remains unsatisfied. The best practice in all cases, however, is simply to foreclose within 90 days of filing the original lien. However, a lien recorded prematurely (before work is completed or the contract is terminated) is null and void, and will require an additional lien to be recorded assuming the window is still open.

Details Matter

Lastly, it may be wise to double check to ensure that all formalities have been observed in the mechanics lien itself. The lien must contain the following information: (1) the claimant’s damages after offsets; (2) the name of the owner; (3) the nature of the work done by the claimant; (4) the name of the person who employed the claimant; (5) the claimant’s address; (6) a description of the job site; (7) an affidavit of proof of service on the owner; and (8) “Notice of Mechanics Lien” displayed in bold.

The lien must be served on the owner by registered mail, certified mail, or first class mail, with a certificate of mailing, and at the owner’s residence or place of business as indicated on the building permit. Failure to serve the lien properly will render it unenforceable. The lien must also be recorded within 90 days, and should be filed in person if the deadline is getting close.

Important Florida Lien Law Update

Brian A. Wolf | Smith Currie & Hancock

Under Florida law, a claim of lien must be recorded in the real property records within 90 days of the claimant’s last date of work. Many contractors and subcontractors wait as long as possible before recording a claim of lien to exhaust efforts to obtain payment without recording a lien. During the COVID-19 pandemic, waiting to record a lien has created a real problem since county clerk offices charged with recording claims of lien were forced to limit access and reduced staff. Many contractors delivered their claims of lien on time for recording electronically, but the clerk’s offices did not officially record the claims of lien until days or even weeks later. In many cases, the county clerks recorded the claims of lien after the 90-day deadline.

A new decision by a Florida Appellate Court, Phillips v. Pritchett Trucking, No. 1D20-2068, Fla. 1st DCA (Oct. 6 2021), provides contractors and subcontractors with relief when they deliver a claim of lien to the clerk’s office and pay their recording fee prior to the expiration of the 90-day deadline. The Court determined as a matter of law that a claim of lien must be recorded by the clerk’s office on the date the clerk received the lien for recording with the recording fee. The Court reasoned that the clerks are required as a matter of law to record a claim of lien immediately upon receipt of payment. As a result, all county clerk offices will be required to record claims of lien on the date they receive both the lien and payment for recording.

Bonding Off Mechanic’s Liens: Not Just for Property Owners

Thomas Lambert | Pullman & Comley

Property owners are often confronted with a contractor threatening a mechanic’s lien on their property. These liens may stem from a dispute between them and their contractor, or even between a subcontractor and a general contractor that was not compensated for their work. Many in the real estate and construction industry believe they are fully familiar with Conn. Gen. Stat. §49-37, the statute permitting the substitution of a bond in lieu of a lien.

But what happens when the lien is placed upon the property by a subcontractor whose performance is believed by the general contractor to be substandard or overpriced?  Simultaneously, the owner may also demand the general contractor to “just get rid of it, and don’t involve me.”  Often a general contractor will simply give in and pay the excessive claim to keep their customer – the owner – happy.

However, there is another way the statute can be used by contractors to deal with a lien that does not directly involve a dispute with the property owner itself. In fact, the statute need not only be used only by property owners. Specifically, the statute states that “[w]henever any mechanic’s lien has been placed upon any real estate … the owner of that real estate, or any person interested in it, may make an application to any judge of the Superior Court that the lien be dissolved upon the substitution of a bond with surety.” (Emphasis added). The “any person interested in it” portion of the statute should not be overlooked.

The Connecticut Supreme Court took up the issue of who may avail themselves of Conn. Gen. Stat. §49-37 in Henry F. Raab Connecticut, Inc. v. J.W. Fisher Company, 183 Conn. 108 (1981). In that case, a subcontractor placed a lien on a property for services rendered and materials furnished to the plaintiff contractor. The property owner withheld monies from the plaintiff contractor until the lien was dissolved, prompting the plaintiff contractor’s application to dissolve the lien. The trial court granted the application to dissolve the lien and the subcontractor appealed. In its decision, the Supreme Court found that the plaintiff contractor was a “person interested” in the property because monies were being withheld from the plaintiff due to the subcontractor’s lien. It went on to state that, because of its subcontractor’s lien, the plaintiff had a “direct and present interest in the land, i.e., to endeavor to obtain the dissolution of the [subcontractor] lien and substitute a sufficient surety bond.”

More recently, in the Superior Court decision of Marco Contractors, Inc. v. LC General Contractor, LLC, Superior Court, Judicial District of Hartford, Docket No. CV18-6092859 (Aug. 17, 2018) (Noble, J.), the plaintiff contractor similarly applied to dissolve a mechanic’s lien from a subcontractor, attaching a bond to its application with the court. As a consequence of the subcontractor filing the lien, the property owner had withheld payment until the contractor removed the lien. Pursuant to its contract, the plaintiff contractor was obligated to remove any liens that encumbered the property. Like in Henry F. Raab, the court in Marco Contractors found the plaintiff contractor to have a “direct and present interest in the property,” this time by virtue of its contractual obligation to obtain dissolution of a mechanic’s lien that encumbered it.

Projects need to move forward and cannot be held up by a wayward subcontractor. Contractors thus may be able to use the “any person interested in it” provision of the statute to bond off their subcontractors mechanic’s lien, oftentimes since the contractors have the direct contractual relationship with the subcontractors and the financial incentive to dissolve the lien to make sure the contractors themselves get paid. Property owners should consider having their contractors dissolve the lien pursuant to Conn. Gen. Stat. §49-37 and keep any disputes between contractors from becoming their own problem.