A Catch-22: Pay When Paid Clauses Do Not Extend the Lien Period

If you search “Pay When Paid Clauses” in Google, you’re going to get a lot of results that say a lot different things.   This contractual provision – used in almost every general / sub construction contract – is perhaps one of the most confusing or misunderstood provisions out there.

Wolfe Law Group’s Construction Law Monitor recently blogged about the dangers of using one contract in multiple states.   The post used the “pay when paid” provision as an example of why multi-state contracts are problematic.

The provision itself seems pretty clear:  one party will get paid when the other party gets paid.    It isn’t.   Interpretation of this provision varies by state, with some states striking down the provision entirely as against “public policy” and other states distinguishing between “pay when paid” provisions and “pay if paid” provisions.   The only way to protect your company against this tricky provision is to consult with an attorney about how these provisions are treated in your jurisdiction.

While interpretation of “pay when paid” provisions differ from state-to-state, there does appear to be one constant about this provision across the country:   It doesn’t extend your lien period.

Most states require liens be filed within a certain period after you last worked on the project, or after the project is complete.   The fact that you or your company is waiting for payment because the prime or an upper-tiered sub hasn’t been paid is completely irrelevant.  The lien period still starts when it starts, and ends when it ends.

As you might imagine, this presents a bit of a Catch-22.

On the one hand, you must file a lien to preserve your right to lien.  On the other hand, filing a lien may complicate the payment problems for the prime or upper tier sub (and thus your payment problem), and may cause animosity when negotiations are otherwise calm.

Unfortunately, there is  no easy fix for this complication.    Each situation should be examined individually, and sometimes, a simple joint check agreement may be the solution.  It’s just important to remember that good faith negotiations and waiting for payment under a contractual obligation to do so will not likely extend the lien period, and too much talk could result in the loss of lien rights.

Here are some great resources and articles on Pay When Paid provisions:

- Fourth Circuit Concludes Pay When Paid Clause is Unambiguous and Enforceable

- Pay When Paid or Pay If Paid Provisions

- Is Your Pay When Paid Clause Worthless?

- Contingent Payment Clauses, Use With Caution

Liens Make Your Payment Problem the Entire Project’s Biggest Problem

When you don’t get paid on a construction project, that is a big problem for you and your company.   But, is it a big problem for the entire construction project?    Not likely.

So, how do you make your problem an important problem to the other players working on a construction job?    With a mechanic’s lien, of course.

The Wall Street Journal recently reported on a mega-project in Las Vegas (the $8.5 billion City Center), and a contractor dispute that is affecting the project’s finances.    There was something really interesting about this report for those of us who follow mechanic lien law and news – and that’s this quote from City Center President Bobby Baldwin, referring to over $500 million in liens filed against the project:

Obviously everybody is concerned about the liens.   They have to be explained in great detail to our residential buyers.

To resolve the concern about the liens, the property owner is slowly paying off all of the subcontractor and supplier claims while they proceed with their dispute against the prime contractor.    Without those liens, those subs and suppliers would have to wait months or years for the main dispute to resolve, and payment to trickle down from the owner to them.   Depending on the size of the contract, that’s something that could cripple their business.

The Wall Street Journal article and construction dispute at the City Center was the subject of a blog post on the Construction Law Monitor, which that blog called a “Large-Scale Example of an Everyday Construction Dispute.”    And that summary is perfectly true when it comes down to mechanics liens.

Regardless of how large or how small the project, mechanics liens creates a problem for the project.   If you’re not paid on a construction project, the best way to make your problem the construction project’s problem, is to file a mechanics lien.

Vote For Construction Lien Blog As Best Construction Blog

The good folks at ConstructionMarketingIdeas.com are holding a Best Construction Blog Competition, and the Construction Lien Blog has been nominated.

If you’re a fan of what we do here, we’d appreciate you visiting this page and casting your vote for us.  You can also vote for our friends the Construction Law Monitor and Construction Law Musings.   They are just above us on the list.

As usual, thanks for reading!

Use Express Lien To Stay Organized in 2010

Thanks to our friends over at Wolfe Law Group’s Construction Law Monitor for their blog post yesterday recommending the Express Lien Lien Pilot to contractors looking to get organized in the new year.   Organization: A Secret to Managing Legal Messes discussed how good organization tools (and specifically web-based tools) can help contractors and others in the legal industry to avoid legal disputes and expensive legal bills.

In discussing how organization can help an organization with its legal obligations, the post says:

And insofar as your contractual and legal duties are concerned, if you’re organized and know what they are, you’ll have a much better chance of fulfilling them.

This is exactly what the Lien Pilot can do for your business.

Notice and lien requirements are hyper-technical and confusing.  If your company is handling multiple construction projects, or working in multiple states, it’s nearly impossible to keep track of notice and lien requirements.    Some clients reported that they used to keep track of lien and notice deadlines by inputted all due dates in Outlook – which, of course, required them to manually calculate the dates.

Express Lien provides contractors with an easier way.  You simply input your project’s details, and Express Lien calculates all of the project’s notice and lien requirements and deadlines.

In 2010, make a resolution to increase your bottom line and utilize the nation’s lien laws to protect your right to payment on construction projects.   Resolute your company to Lien Smarter in the new year, and sign up for a free account with Express Lien.

Construction Outlook Grim through 2010 – Staying Ahead of Accounts Receivables To Retain Its Importance

Ken Simonson, the chief economist for the Associated General Contractors of America, doesn’t have good news for the construction industry as the challenging year 2009 drags into its 3rd Quarter.

According to Simonson, the commercial construction industry forecast remains grim “at least through 2010.”

For contractors, suppliers, and other construction professionals throughout the nation, this means that good record-keeping and collection practices remain important.

Almost one year ago, Wolfe Law Group posted an article on its Construction Law Monitor after Ken Simonson reported that 2009 would present economic challenges to contractors.

Now more than ever, the article stated, contractors should consider the benefits of a construction or mechanics lien.  The article went on to state:

As soon as the construction project comes to a halt or payment is late, contractors, subcontractors and suppliers should rush to file its construction / mechanics lien to protect its interest in the property. Construction liens are available in virtually every state, and works to transform the project job site as a sort of “collateral” to the contractor for its payment.

The time available to file a construction lien is not indefinite, and the legal requirements should be followed to the letter. However, when filed correctly, a construction lien can help your company recover payment for its project.

Although the stimulus spending will be cause for some optimism in the construction industry, it appears economic struggles will stick around into 2010.    And the recommendations of Wolfe Law Group in 2009 are repeated today.

If your company is awaiting payment, file your lien with Express Lien today.   Lien Smarter…Get Paid.

Illinois Contemplating Amendment to Mechanics Lien Statute

It appears that the Illinois legislature is contemplating an amendment to its mechanic’s lien statute, as reported last week by the informative Illinois Construction Law Blog.  According to that blog post, the guts of the amendment would require contractors (non-subs) to given written notice on owner-occupied single family residences prior to filing a lien.

According to the blog, this requirement already exists for subcontractors, and the purpose of the amendment would be to extend the requirement to contractors who contract directly with the property owner.

The Illinois Construction Law Blog does weigh the pros and cons of the bill.

In their discussion, they mention that the bill makes sense because homeowners cannot be considered as sophisticated as commercial property developers.

On the other hand, however, since the bill would only require notice before filing the lien, the blog states that notice could be given the day before the lien is filed.  Of this timeframe, the author asks "what protection does that afford the home-owner?"

A similar requirement exists in Louisiana, according to Wolfe Law Group’s Construction Law Monitor. They describe the requirement as follows:

Notice is required whenever you are working on a residential project, and you contract directly with the owner of the property, who also lives in the residence.

The type of notice required is called the “Notice of Lien Rights.”

The Notice of Lien Rights to be sent to owners in residential projects is very important, because the law requires that it be provided before work begins, and not as a condition to your construction contract.

Read full article here.

The difference between the Louisiana requirement and the requiremnet in Illinois, however, is that in Louisiana notice is required before work begins, and in Illinois, its required only before filing the lien.  Perhaps the goals of the Illinois legislature would be better achieved by a rule similar to that of Louisiana’s?

Nevertheless, for the time being, the requirement does not exist at all for contractors in Illinois, and is only a twinkle in the legislature’s eye.  You can track the progress of the bill at this link.