June 2008

In This Issue

• "Pay-if-Paid" Bites the Dust in Another State
• AIA Adopts Integrated Project Delivery Documents
• How to Deal with Mechanic's Liens and Bond Claims on Public Work

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"Pay-if-Paid" Bites the Dust in Another State

Donald W. Gregory, Construction Law Chair

Nevada recently joined the list of states (like California and New York) that have found “pay-if-paid” clauses unenforceable as against public policy. The Supreme Court of Nevada ruled that lien waivers and “pay-if-paid” provisions used on the Venetian project were invalid because the “pay-if-paid” provision “limits a subcontractor’s ability to get paid for work already performed” and “has the same practical effect” as a waiver of lien rights. Lehrer McGovern Bovis, Inc. v. Bullock Insulation, Inc., et al., 124 Nev. Adv. Op. 39 (June 2008).

While many states still find “pay-if-paid” clauses (meaning that if the owner does not pay the general contractor, the subs never get paid) enforceable if plainly and unambiguously stated, it appears that many courts are recognizing the inherent unfairness of such clauses and looking for a way to declare them invalid, particularly if they have the practical impact of restricting subcontractors’ statutory or constitutional rights to mechanic’s liens.

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AIA Adopts Integrated Project Delivery Documents

ConsensusDOCS took the lead in 2007 by adopting the ConsensusDOCS 300 series of forms dealing with a collaborative project delivery system, often times referred to as Integrated Project Delivery (“IPD”), where all members of the construction team sign a single contract document and work together in the best interests of the project.

Now the American Institute of Architects (“AIA”) has followed suit and created its own IPD documents – in two different forms. The first (A295) is designed for those less familiar with IPD and is basically an owner-contractor GMP arrangement that talks about how the parties will work together at various stages of the project.

The second form (C195) creates a single-purpose LLC with the owner, architect and contractor acting as primary members. It blurs traditional lines between design and construction and all participants find themselves “in the same boat” together.

The designer and contractor have two opportunities to profit – first, if they meet project goals outlined by the group or second, if actual cost is less than the estimated target cost.

Unlike the ConsensusDOCS 300, the AIA documents are not a multi-party agreement. Nevertheless, they still require a high degree of trust and may be best suited to a sophisticated owner on a complex project with regular and trusted “partners.”

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How to Deal with Mechanic's Liens and Bond Claims on Public Work

Ohio gives subcontractors and suppliers on public work the right to lien the public funds or collect against the contractor's payment bond -- but only if those lien and bond rights are properly perfected. Unlike private work, public real estate (i.e. city hall) is not allowed to be liened or foreclosed.

Any supplier or subcontractor wanting to perfect lien or bond rights must provide a simple form called a Notice of Furnishing ("NOF") to the prime contractor (within 21 days of first work) if:

1. The potential lien claimant does not have a contract directly with the prime contractor; and
2. The amount of the contract or purchase order collectively exceeds $30,000.

Contractors who receive a NOF must be careful to secure lien waivers from anyone serving a NOF.

If a NOF is required and has been timely provided, the potential lien claimant must file its lien within 120 days of his last work, and its bond claim within 60 days of acceptance of the project by the public authority. If a lien is filed after the project funds are fully paid out, the lien has no value.

Once a lien has been asserted, the public owner (i.e. city, ODOT) is to set aside the lien amount in escrow until the lien claimant and the contractor come to a resolution or the court orders a disbursement.

However, contractors are cautioned that they must dispute the lien within 20 days or the public owner may pay the money directly to the lien claimant. Contractors can also "bond off" the lien by posting an additional bond or cash deposit in 1 ½ times the lien amount.
Subcontractors and suppliers are cautioned that they must file suit within 1 year of "project acceptance" or the bond claim will be considered untimely and that a suit must be filed on the lien within:

1. 60 days of receipt of a Notice to Commence Suit; and
2. Six years of the filing of the lien in any event.

Mechanic's liens and payment bond claims give subcontractors and suppliers (who protect their rights), special leverage, but contractors also have tools to insure that they do not "pay twice" for the work. Effective use of those tools often makes the difference between a successful or unsuccessful project.

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