Thursday, May 29, 2008

When the Subcontractor Does Not Get Paid

There is a great deal of confusion about what to do when a contractor does not pay the subcontractor. The homeowner wonders if he is liable when subcontractors start knocking on his door, saying they are still owed money. Subcontractors are not sure about their rights either. They are upset that the general has not paid them, and do not know what to do next.

Please keep in mind that the following information applies to Massachusetts law. I suspect that other states are similar, but you need to consult with your own legal advisor about these issues.

The general rule is that when the contract is between the contractor and the subcontractor, the homeowner is not liable to the sub for payment.

There is an exception carved out in the law that helps to protect subcontractors, and that is the mechanic's lien law. Mechanic's liens are generally a creature of statute, which means they are governed by a specific law. In Massachusetts, that law states that subcontractors can place liens on an owner's property as long as they follow the specific requirements of the statute. For those who want to read the section of the law that applies to subcontractors, here it is:

Chapter 254: Section 4. Subcontractors; written contract; notice; filing; form; indirect contractual relationship; notice of identification

Section 4. Whoever furnishes labor, including subcontractor construction management services, or who furnishes material, or both labor and material, or furnishes rental equipment, appliances or tools, under a written contract with a contractor, or with a subcontractor of such contractor, may file or record in the registry of deeds for the county or district where such land lies a notice of his contract substantially in the following form:

For a complete version of that section, you can go to:

http://www.mass.gov/legis/laws/mgl/mgllink.htm

Filing a lien is a bit complicated, and it is very easy to do it wrong.

So, the homeowner may ask, how can a subcontractor place a lien on my property when my contract is with the general contractor?

The answer is: that is the subcontractor's right, but whether she will prevail is another story.

The owner is only liable to the subcontractor for the amount of money that is still owed to the general contractor.

So, how does this work in practice?

General contractor abandons the job and has been paid in full. Subcontractors have not been paid. Subcontractor files a lien. Homeowner goes to court to dissolve the lien, proving that the GC has been paid in full. Subcontractor loses. Subcontractor still has a claim against the GC for payment.

GC finishes the job and is still owed $30,000.00. Subcontractors have not been paid and the aggregate amount owed is $50,000.00. There is $30,000.00 left in the pot, and the subcontractors will not be paid in full.

The contract designates that certain payments are earmarked for subcontractors. Those payments are made, but money is still owed to the GC. I would argue that the GC has been paid for the work done by the subs, so no money is owed. However, I have not read case law regarding that scenario.

So, if I am a homeowner, and the subs are not getting paid, what can I do?

1. Write joint checks to the GC and the sub so both have to endorse the check before it is cashed.

2. Ask the subs for lien waivers as they finish their work.

3. Sometimes it is better to pay the subs twice just to get the work done and avoid legal fees and extra costs to complete the job. It's a hard pill to swallow, but try to be level-headed about what you do.

When the GC is in trouble, the first sign is frequently that subs start to complain about not getting paid. The homeowner should respond at the first sign of a problem and address the issue as quickly as possible.

There are some additional technicalities in the lien law that a homeowner may follow, but those would only add further confusion to the issue.

56 Comments:

At 6:15 PM, Anonymous Anonymous said...

I was a contractor in new York state in the 1980's. There, and then, mechanic's lien's were extremely, if not impossible to collect on. We had contractors liens on several houses, that we later found out were sold, without our knowledge. so, the homeowner didn't pay, they used the house, then they sold the house, which more or less indicated that the mechanic's lien was not very useful.

Is the mechanic's lien a stronger item in Massachusetts now?

 
At 9:42 AM, Anonymous Anonymous said...

I was subcontractor for Triumph Contracting LLC in Baltimore. I was told that I couldn't get my money til they got paid, even though I had completed my work. When you're low man on the chain, you get screwed. I finally walked off the job and left without ever being paid.

 
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At 4:37 AM, Anonymous Anonymous said...

I paid the GC over 60k to build a house, ( 1/3 ). He left with over 40k. The debris removal company did not get paid and is suing me for $2100. I do not have a contract with them, nor have I ever met them, I hope I dont have to pay them, if so anyone can step forward claim a contract with my GC and sue me for damages. Unfair to the Homeowner not the subs, sorry guys.

 
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