Most states prohibit parties from contracting out of their mechanics lien rights. A supplier or a subcontractor, in other words, cannot agree before starting a project that they will waive their lien rights. These provisions – referred to as ‘no lien clauses’ – are invalid in most jurisdictions because they violate “public policy.”
The ‘no lien clause’ is merely a contractual device invented by general contractors and owners to offset the financial risk on a project and place it onto parties further down the contracting chain. This epic battle between the top of the project and the bottom of the project has been explored in detail here under our “Viewpoints” category of articles recently, such as in Getting Paid In The Construction Industry: A War Between Policy, Contracts, and Tempers.
While most states expressly prohibit these no lien clauses, very few of them have case law to discuss some other contract provisions that may have the same chilling effect on lien rights. This article explores these controversial contract clauses and what it may or may not mean to your lien rights.
Pay When Paid or Pay If Paid Clauses
A “pay when paid” or “pay if paid” provision can be confusing when compared with a party’s mechanics lien rights (learn the difference between “when” and “if” in this article). A few months ago we wrote an article that specifically discussed these clauses and how they fit in the risk shifting battle between GCs and Subcontractors: Pay If Paid Provisions Highlight Epic Payment Battle Between GCs and Subcontractors.
If a state’s public policy requires lien rights remain in tact to protect subcontractors and suppliers’ right to payment, and it cannot be waived, isn’t a “pay if paid” provision creating a scenario to defeat the state’s public policy of protecting subcontractors and suppliers? These clauses are confusing when thinking about lien and bond claim rights because a party could theoretically not be contractually owed any money but also facing a lien or bond claim deadline.
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Let’s take Washington state’s private mechanics lien law as an example. In that state, a contractor or supplier has 90 days from last furnishing labor or material to file a mechanics lien. If that party also has a “pay if paid” provision in their contract, and the party who hired them hasn’t been paid as of that 90th day, can a mechanics lien be filed?
This riddle can be repeated for every state and every type of claim law, and unfortunately, the courts haven’t really chimed in.
The “pay if paid” provision jurisprudence may be on a collision course with the “no liens clause” jurisprudence. If a state’s public policy requires lien rights remain in tact to protect subcontractors and suppliers’ right to payment, and it cannot be waived, isn’t a “pay if paid” provision creating a scenario to defeat the state’s public policy of protecting subcontractors and suppliers?
Who knows where this is going to end up, but expect a lot of messy and conflicting decisions to start popping up on this topic in the near future.
Mediation or Arbitration Clauses
We published an article here yesterday titled “Mechanics Lien Deadlines Not Extended By Mediation Clauses.” This article subtlety addressed the issue of how mediation clauses and mechanics lien rights may clash, but did not directly address whether a “mediation clause” could be read as an invalid “no lien clause.”
Again, however, if the state’s public policy requires that subcontractors and suppliers have mechanics lien rights to protect them against non-payment, and a mediation provision either explicitly or practically nullifies that right, how can the mediation clause be invalid?
Unlike the issue with pay-if-paid provisions, the friction between mediation clauses and mechanics lien rights actually has gotten some treatment in the courts. The courts have sided in favor of the policy to protect subcontractors and suppliers, and therefore, mediation (and arbitration) clauses are read to not impact a party’s right to file a mechanics lien.
Restrictive Claim Notice Provisions
Risk shifting provisions have come and gone in the construction law world. No lien clauses came and largely went, pay when paid clauses reigned until being replaced by pay if paid clauses, and mediation and arbitration clauses now try to plug the litigation dam before it’s too late. Owners and general contractors, and their attorneys, are constantly pouring over the contract’s words to fabricate ways of pushing the risk of non-payment down the contracting chain.
If the parties cannot contract out of their lien rights, how can they agree to a claims provision in the contract that overrides and essentially nullifies a lien claim or bond claim right? Popular today are “claim notice” provisions. These provisions require parties to present any claim within a set amount of time — and usually a very, very short amount of time. If the claim is not presented in the set timeframe, and not presented exactly as required by the contract, the claim is “waived.”
There are a lot of legal issues about these claim notice provisions and a healthy debate is on-going in the courts and among the construction law bar. Nevertheless, these claim provisions are real and are getting sometimes favorable treatment in the courts.
Again, however, we must inquire about whether the provisions are legally null and void because of the state’s interests in providing subcontractors and suppliers a mechanics lien right. If the parties cannot contract out of their lien rights, how can they agree to a claims provision in the contract that overrides and essentially nullifies a lien claim or bond claim right?
Lien Rights Arise From Policy and Law, Not Contract
It’s important to keep in mind that a party’s mechanics lien or bond claim rights are completely independent from a party’s rights under contract. In fact, in most states, a party can file a lien or bond claim regardless of whether they have a contractual right or not. These claim rights arise out of the law in favor of a party as soon as they furnish any materials or labor to a construction improvement.
Accordingly, the contract and the terms of the contract are largely irrelevant to what the party can do with their claim rights. While there are some exceptions to this and contracts can impact how much is recoverable, the friction between the law and the contract is very real with respect to these claims.
In many cases, the law wins. In many other cases, however, we just don’t know who wins yet because courts have been silent on the issue. And unfortunately, in too many cases, judges and attorneys are confused about this legal dichotomy, and rulings come out all over the map.