Clearly, mechanic’s liens do not offer a one-size-fits-all approach to reimbursement. Nuances relating to notice, service, and procedure are common stumbling blocks on the path to payment. Even a simple error in procedure or form can be fatal to the success of a claim. Thus, to perfect a lien, the claimant must appreciate and satisfy its jurisdiction’s statutory requirements.
The Miller Act and state Little Miller Acts enable contractors, subcontractors and material suppliers to file claims against payment bonds to recover payments due and owing on public construction projects.
Mechanic’s liens cannot attach to public property. Thus, the security interest described above is not available to those furnishing labor and materials to public construction projects. Congress passed the Miller Act in 1935 to provide contractors with an alternative means of securing payment for their work and services: the payment bond. A payment bond is a surety bond guaranteeing payment for work performed on a construction project and is intended to protect those supplying labor and material on public projects from non-payment. The Miller Act requires that payment bonds be furnished on projects involving more than $100,000 of construction, alteration, or repair of any public building or public work of the Federal Government.
The Miller Act permits every person that has furnished labor or material in carrying out the work provided for in a contract for which a payment bond is furnished, and that has not been paid in full within 90 days after it furnished the last of its labor or materials, to bring a civil action on the payment bond for the amount it has not been paid. Potential claimants are limited to first and second-tier subcontractors. A second-tier claimant must first provide written notice of its claim to the prime contractor who furnished the bond within 90 days of last performing work giving rise to its claim. Claims against payment bonds must be brought within one year after the day on which the claimant last furnished labor or material giving rise to its claim in the District Court in which the contract was to be performed and executed.
States have followed in the federal government’s footsteps and passed “Little Miller Acts” which require payment bonds on state construction projects of specified monetary thresholds. Generally, the Little Miller Acts are modeled after the Miller Act and therefore, share more consistency than their lien laws. For example, both Pennsylvania and New Jersey require: (1) that payment bonds be in an amount not less than 100% of the contract value; (2) second-tier subcontractors to notify the bond principal (typically the general contractor) in writing of intent to file a bond claim; and (3) bond claims be initiated within one year of performing work. Nevertheless, nuances across states do exist and close attention to the particularities of each Little Miller Act is critical to the success of a payment bond claim.
Prompt payment laws provide contractors and/or subcontractors additional protection and leverage in payment disputes.
A large majority of states have passed prompt payment laws which identify deadlines by which payments must be rendered on construction projects and provide for penalties when payments are wrongfully withheld. These laws can apply to both public and private projects.
Generally, prompt payment laws require that payments for work performed in accordance with the contract be made within certain time periods (e.g., 20-30 calendar days after an invoice). The laws also require upstream parties to notify the payee in writing of the reasons for non-payment and to release payments that are not disputed. If these requirements are not satisfied or if withholdings are made in bad faith, the payee can suspend performance, collect interest on the amount withheld, and even recover attorneys' fees incurred to recover payments due. Many states prohibit waiver of these protections in construction contracts. Thus, prompt payment laws can provide significant protection and leverage to contractors and subcontractors before, during and after a project.
If a payment dispute is not resolved and the claimant initiates litigation or arbitration, in addition to its claim for breach of contract, it should state a claim for violation of the applicable prompt payment law (if available). Proving a bad faith withholding is a relatively high burden, but if proven, the award of fees and interest will be a substantial recovery for a claimant who has been denied payment during the pendency of a dispute.
These statutory remedies provide contractors, subcontractors and material suppliers with avenues of relief as well as protection and leverage during a payment dispute. Payment bond claims and mechanic’s liens offer the claimant security because recovery is not dependent upon the solvency of a project owner or prime contractor. State prompt pay laws inject the prospect that the upstream party may be liable over and above the amount it withheld from the claimant and in some states, even permit the claimant to suspend its performance on the project during the pendency of a dispute.
These remedies are creatures of statute and the protections they afford are conditioned on strict compliance with the prescribed statutory requirements. Failure to satisfy any requirements—especially those relating to notice, service, and substantiation—can be fatal to a claim. Thus, when a payment dispute arises, a deep understanding of the available statutory remedies and a mastery of their requirements are the keys to achieving a successful recovery for your client.