A New Payment Remedy For Suppliers and Subcontracotrs

June 19th, 2009

          A general contractor may now be liable to a supplier and subcontractor even if the supplier and subcontractor fails to perfect its claim against the payment bond on a public project.

           Consider the following scenario:  a supplier furnishes equipment or materials to a subcontractor for a public project.  The subcontractor goes out of business and is replaced by the general contractor.  The supplier’s equipment is then installed by the replacement subcontractor.  The supplier is never paid.  The supplier fails to perfect its claim against the general contractor’s payment bond for the project.

            The supplier files a lawsuit against the general contractor contending that it was unjustly enriched because it never paid for the supplier’s materials.  The general contractor makes the following arguments against the suppliers claim:

1.                  The supplier had no contract with the general contractor but did have an express contract with the subcontractor.  The court should not create a new contract with the general contractor simply because the subcontractor went out of business.  The Michigan Court of Appeals rejected this argument saying that even if there was no contract between the supplier and general contractor, the court can create or imply a contract between these parties to prevent unjust enrichment by one party.

2.                  The general contractor was not “unjustly or inequitably enriched” simply because it retained and used the materials.  Not all enrichment is unjust.  The Court disagreed again finding that no one paid the supplier for the materials that were used.  The general contractor’s retention of the materials was not innocent because it knew the subcontractor had gone out of business and had not paid the supplier.

3.                  The general contractor paid more than the full price under the original subcontract to the replacement subcontractor; and therefore, was not unjustly enriched.  Again, the Court said no.  The mere fact that the general contractor may have paid more than the full contract price originally contemplated does not eliminate its obligation to pay the supplier for the materials used in the project.  The original subcontractor’s breach of contract had nothing to do with the supplier.

4.                  The supplier’s failure to avail itself of a claim against the payment bond bars an unjust enrichment claim.  The Court also rejected this argument finding that the remedy under the payment bond was not the supplier’s exclusive remedy against the general contractor.

What’s the lesson here?  A general contractor must now be more diligent than ever before in its review of subcontractor sworn statements to verify that suppliers and subcontractors have been paid; otherwise, it may be liable to an unpaid subcontractor or supplier.

As Building Companies and Contractors Collapse, The Personal Liability of Owners and Officers Rise

May 14th, 2009

As commercial contractors and residential builders continue to fail, the owners and officers of these companies are being sued personally for violating the Michigan Builder’s Trust Fund Act (BTFA).  The BFTA has both civil and criminal penalties. 

Under the BTFA, the monies paid by an owner or on behalf of an owner – (i.e. title company or bank) to a contractor are deemed held in trust for the benefit of subcontractors and suppliers.  The contractor is considered a “trustee” of the owner’s funds and must use them to first pay subcontractors and suppliers.  The failure of the contractor to do so also gives rise to personal liability of the contractor’s owners and officers. 

Merely because the builder or contractor business entity (i.e. corporation or LLC) is unable to pay its subs and suppliers does not insulate its owners and officers from personal liability or even bankruptcy.  As an example, if Smith Building Company receives payment from the owner and uses the proceeds to pay expenses and some trades but not others.  The building company is out of business or uncollectible.  The unpaid subs and suppliers have, in addition to their lien rights, another remedy:  sue the company’s officers and owners for violating the BTFA.

Consider the 2007 case of Livonia Building Materials v Harrison Construction Co, Keith Penner and Henry Bell 276Mich App 514 (2007).  Livonia Building Materials supplied materials to Harrison Construction.  Harrison was paid by the project owner but failed to pay Livonia Building Material (Livonia) and then went out of business.  Livonia sued Harrison’s president, Mr. Bell and its chief financial officer, Mr. Penner claiming they violated the BFTA.  The Court of Appeals ruled in favor of Livonia Building Materials and rejected all the defenses arguments:  The Court stated:

The difficulties posed by a downturn in the economy or poor business acumen do not excuse noncompliance with the MBTFA’s obligations in regard to accounting practices and ordering of payment.  Although [defendants] may not have acted with bad faith and indeed were simply trying to keep their ongoing concern afloat by paying the most urgent outstanding balances, the MBTFA’s requirements must still be followed, and defendants were certainly required to pay [plaintiff] on its projects when monies came in on those particular projects.


What is the lesson here?  If you are a contractor, you must use the monies received by the owner to first pay subcontractors and suppliers.  There are no defenses.

Even If Late It Is Important For Subcontractors and Suppliers To Give The Notice of Furnishing

May 6th, 2009

The Construction Lien Act (CLA) requires that subcontractors and suppliers serve, by certified mail or personal service, a Notice of Furnishing upon the general contractor and owner’s designee named in the owner’s Notice of Commencement. The Notice of Furnishing must be served within 20 days after first labor or material supplied. Even if the Notice of Furnishing is served after the 20 day period, the subcontractor or supplier’s lien claim may not be affected. If the owner fails pays the contractor – – based upon the contractor’s sworn statement – for the labor or material furnished by the subcontractor or supplier, then the late Notice of Furnishing will reduce or defeat the subcontractor or supplier’s claim of lien by the amount of the owner’s payment. On the other hand, if in the interim, the owner does not pay the contractor – – based upon the contractor’s sworn statement – – for labor or material furnished by the subcontractor or supplier, then the lien amount will not be reduced by the late Notice of Furnishing.

As an example, an electrical subcontractor has a $10,000 lien claim, but gave its late notice of furnishing 60 days late. During the 60 day period, the owner paid the contractor a progress draw – – that included $4,000 for the electrical work – – based upon the contractor’s sworn statement, then the lien amount will be reduced to $6,000 ($10,000 – $4,000).

To summarize, a late Notice of Furnishing will only reduce or defeat a subcontractor or supplier’s lien amount if:

1. the owner pays the contractor based upon the contractor’s sworn statement, and;

2. the owner’s payment includes an amount for the labor or material provided by the subcontractor or supplier.

From my experience, a late Notice of Furnishing only reduces or defeats a lien claim in 20-25% of cases. The point – – – give the Notice of Furnishing, even if LATE.

Payment Bonds – Your Remedy To Get Paid On Public Projects

April 16th, 2009

On public projects (i.e. public schools, colleges, cities, townships) over $50,000, the contractor hired by the governmental/public body must deliver before starting work: (1) a Performance Bond assuring performance to the owner; and (2) a Payment Bond assuring payment to subcontractors, suppliers and laborers. Both Bonds are signed by the Contractor and the Surety (an insurance company).

Subcontractors and Suppliers should make it standard practice to obtain a copy of the Payment Bond before starting work on the project. First, make a request to the contractor for a copy of the Payment Bond. If unsuccessful, make a written request to the governmental body.

Once receiving the Payment Bond, be sure to verify whether your customer is the Contractor who signed the Bond. If yes, there are no preliminary notice requirements, however, it is a good idea to send a notice of claim to both the contractor and governmental body if not paid within 90 days after the last day of work.

If your customer is not the Contractor who signed the Payment Bond, then you are likely a subcontractor to a subcontractor or a supplier to a subcontractor. In such case, you generally have 2 notice requirements: (1) a certified written notice to the contractor within 30 days after your first work or material supply stating what work you are doing and the name of your customer, and (2) a certified written notice to the contractor and governmental body within 90 days after your last work or material supply stating the balance owed, and that you are relying on the Payment Bond.

Not Properly Licensed Equals No Compensation and No Lien

April 3rd, 2009

Residential contractors who contract with homeowners must have a builder’s or maintenance and alteration contractor’s license in the exact name of the party signing the contract according to the Michigan Builder’s Licensing Statute and Michigan court decisions.  It is not enough that Joe Smith has a builder’s license if the contracting party is Smith Construction Corporation.  It is not enough that the party signing the contract is Smith Building Company when the licensed party is Smith Contracting Corporation.  Michigan law takes a very strict and technical interpretation of the licensing requirements.  If the contractor is not properly licensed, the contractor cannot assert a lien and cannot recover on the contract.  The lesson: be absolutely sure when dealing with homeowners that:


(1)               your company is properly licensed;

(2)               the exact name of your licensed company is the signing party on the written contract; and

(3)               you have a written contract and your company’s license number is on the written contract.

Count 90 Calendar Days From Your Last Labor or Supply of Material – – Not Last Invoice- – Phone Call – – Fax – – Email

March 26th, 2009

The Construction Lien Act’s requirement that a claim of lien be recorded within 90 days of the last day of labor or material is strictly interpreted.  90 days means 90 calendar days from the last day you finished labor or material to the Project – – not warranty work.  If the 90th day falls on a weekend or holiday, you will have until the next day.


From my experience, it is very important that you have proof of your last day of labor or material.  Examples may include a time card, signed work order, certificate of occupancy, or signed delivery ticket.  Do not use as your last day the following:

(1)               your last invoice date;

(2)               your last phone call, fax or email requesting payment;

(3)               your last warranty work or even punch list work that may be interpreted as warranty work.

Avoid Common Mistakes and Myths Regarding Liens and Payment Bonds

March 23rd, 2009

Here are some common mistakes that I often see suppliers, subcontractors and contractors make in trying to establish a construction lien or claim against the payment bond:

A.        Construction Liens: 

            (1)        The Notice of Furnishing is sent to only the owner’s designee instead of to both the owner’s designee and the general contractor.

            (2)        The Notice of Furnishing is sent at the same time as the Claim of Lien is recorded instead of either;

(a)                before work starts;

(b)               within 20 days after work starts, or

(c)                after the 20 day period, late may not be fatal

            (3)        The Claim of Lien is recorded within 90 days of last invoice date or last warranty work instead of last day of original contract labor or material delivery.

            (4)        The Claim of Lien contains in the first part the day the Claim is signed rather than the first day labor or material is furnished.

            (5)        The Claim of Lien is only recorded but not served on the owner instead of serving a copy on the owner’s designee or owner.

            (6)        The amount of the Claim of Lien includes only signed change orders, instead of all change orders whether signed or not.

            (7)        The Contractor is paid by the owner without a sworn statement instead of based on the contractor’s sworn statement.


B.        Payment Bonds:

            (1)        The Subcontractor or Supplier obtains the Payment Bond at the end of their contract instead of before they start.

            (2)        The Subcontractor of a Subcontractor or Supplier to a Subcontractor gives the first notice of furnishing to the general contractor after, instead of within 30 days of their first labor or material.

            (3)        The claim notice (within 90 days after last labor or material) is given to the surety or general contractor but not to the governmental body.