The following information is intended as general guidance on how subcontractors and suppliers can secure and receive payments that are due. There are four main methods for obtaining security and enforcing payment obligations in New York State.
1. The Mechanic's Lien Law. The two broad categories are a public lien and private lien. The determination of which type of lien to is appropriate to file depends on ownership of the subject real property and the source of funding for the project.
A. Public Lien. A public lien must be filed within thirty days after final completion of the project is achieved. This time limit does not depend on when a subcontractor performs its work or when a supplier delivers its materials to the project. Instead, the period of time within which the lien must be filed is measured from final completion of the entire project. Some public agencies issue certificates of final completion so that this time frame can be determined. Most often, as long as the public funds have not been fully dispersed the lien will attach.
B. Private Lien. A private lien must be filed within four months of last performing work or delivering materials to a project if the project is a residence or within eight months if the project is commercial in nature.
A private lien has a duration of one year from the date of filing and can be extended for an additional one year by the filing of a notice of extension of the lien, except for single family residences which require a court order to be extended.
In either case, before the expiration of the lien, a mechanic's lien foreclosure action must be commenced in order to preserve the lien. The mechanic's lien foreclosure action requires a summons and complaint be filed and served. Typically, a notice of pendency also must be filed.
It is important to recognize that a lien acts only as security for an underlying contractual or quasi-contractual debt. Although a lien can be filed for the full amount due, it is only enforceable to the extent that moneys are due and owing "upstream" to the party against whom the lien is claimed. If, for example, a general contractor has back charges, even if completely unrelated to the materials the supplier delivered to its subcontractor, the supplier's right to enforce its mechanics’ lien are reduced. Even if a lien is unenforceable, subcontractors and suppliers can still maintain a breach of contract action directly against the party with whom they contracted. The derivative nature of a mechanic's lien makes it important to file a lien as soon as possible. The filing of a lien typically results in the owner and/or general contractor withholding payments "down stream". Consequently, the prompt filing of a lien will usually result in greater funds against which the lien can attach and be enforced.
Additional devices to consider in the mechanic's lien area include a demand for terms of contract and a demand for a verified statement. The demand for terms of contract, if not responded to within thirty days, can create direct liability on the part of a remote party if the claimant cannot collect against the party with whom it contracted. The demand for a verified statement will be discussed below.
2. Payment Bond Claims. Independent of mechanic's lien rights, subcontractors and suppliers should be conscious of the possibility of a payment bond existing. The larger the job the more likely a payment bond exists. Also note, nearly all public jobs require payment bonds. A typical payment bond requires suppliers (but not subcontractors in direct contract with the prime contractor) to provide written notice, sent by certified mail, return receipt requested, to all parties "upstream" within ninety days of last supplying materials to the subject project. Bond terms vary, but ninety days is typical.
The payment bond claim should include the name of the project, the contractual relationships (i.e., owner, general contractor and subcontractor, etc.), and the amount owed.
A payment bond claim can be made even if the name of the surety is not known. All that is required is that written notice be sent certified mail, return receipt requested within the appropriate period of time to the owner and contractor (i.e., the principal on the bond). Some bonds excuse the written notice requirement if the bond claimant has a direct contract with the principal on the bond. Unless the bond terms are known, it is best to send the written notice to all interested parties.
Bonds typically have two time limits. First, a written notice requirement such as the one detailed above acts a condition precedent to a bond claim. And second, a period of limitations requirement usually exists which requires that any lawsuit on the bond be commenced within a certain period of time. The typical time limitation to commence a lawsuit is one year from the last day worked or the last day materials are supplied to a particular project.
A supplier's payment bond claim is enforceable against the bonding company regardless of whether or not the general contractor (the principal on the bond) has paid its subcontractor in full. Thus, the inherent limitation on the enforceability of liens (i.e., derivative rights) is not an obstacle to the enforcement of a payment bond claim. Accordingly, a payment bond claim is of greater value than a lien because it provides greater security for payment if it can be proven that work was performed or deliveries of materials occurred.
Note: In the case of either a mechanic's lien or a payment bond claim, it is critical to prove that moneys are due under a contract, etc. For suppliers, proof that materials were actually delivered to a particular job is needed. Accordingly, approved requisitions for payment, signed delivery tickets showing the name of the project, etc., are important proof of the amount due. Suppliers, if possible, should avoid shipments to a customer's warehouse, as lien and bond rights may be limited in such a case.
3. Trust Fund Diversion Claims. Article 3-A of the New York State Lien Law, which operates completely independent of the mechanic's lien law itself, has the potential to create personal liability on the part of the officers of the contractor if a corporation. Contractors are duty bound to make sure that moneys intended for the costs of improvement on a given project are used to first to pay those that actually improve the project. If a general contractor pays a subcontractor and the subcontractor pays, for example, a supplier from another job (or goes on vacation to Italy), the officers of the subcontractor could be personally liable. The first step to create liability is to serve a demand for a verified statement which demands information, under oath, as to the application of the funds received upstream.
4. Personal Guaranty. Credit applications and contracts may provide for a personal guaranty so that a direct action and/or arbitration against the individual guarantor can be maintained. There are expedited procedures available in court when a lawsuit is based on a personal guaranty.
The best way for subcontractors and suppliers to enforce payment rights is to be conscious of their lien and payment bond rights, which act as security for contractual and quasi-contractual debts. Merely filing a mechanic's lien and making a payment bond claim will not typically result in payment. Sureties as a rule do not voluntarily pay claims and an owner or contractor will likewise not pay until the subcontractor and/or supplier "judicially" establishes its right to payment. While it is important to file a lien and/or make a payment bond claim for security purposes, it is equally important to speedily obtain a judgment or arbitrator's award. The time within which a recovery can be had depend on numerous factors, the most important of which is the claimant's ability to clearly document the amount owed.
Various legislative initiatives like the New York Prompt Payment Act should also be considered as possible tools to expedite payments.
Subcontractors and suppliers should consult with counsel as soon as it become apparent that a payment risk exists as the information contained in this article is intended as general guidance only.