by John P. McGill
On private works projects the contractor has a very powerful right that can be used to at least contest non-payment, if not actually assure the payment is made: the Mechanics Lien. In California, the Mechanics Lien right is constitutional, unlike other states where the right is only statutory. Having it in the Constitution means that the courts take it very seriously and the rights the Lien secures are significant and important and are not easily compromised or ignored.
The Mechanics Lien assures that you, the contractor, can assert your right to be paid, but the amount that you can recover is not unlimited and it is not simply a case of saying that you are owed $X and therefore the court should order that $X be paid to you. There’s more to it than that and a recent court decision reminds us that the property owner also has rights.
In the case Appel v Webcor Construction, the Court ruled that the amount that can be recovered on a Mechanics Lien is not necessarily the amount the contractor says it is owed. The owner can challenge the contractor’s claim and can force the contractor to prove that the amount claimed is, in fact, the amount that is owed.
In the Appel case, Webcor was the general contractor on a multi-story condominium project in Los Angeles. The original cost of construction was $65.5M but there were a number of change orders that pushed the cost much higher. Webcor was not paid and recorded a Mechanics Lien against the project and the individual owners that had purchased units.
The developer and Webcor then entered into a settlement agreement whereby it was agreed that Webcor was entitled to significant additional money ($32M) and, as part of the agreement, it was also agreed that the GMP for the project was $95M. The developer had no assets though and was never expected to pay; the individual owners would be responsible for that.
The case came to trial and Webcor asked the court to preclude the individual owners from introducing any testimony or evidence about the GMP because the settlement agreement with the developer stipulated what that amount was and, as well, because the owners were not party to the construction agreement and so should not be able to use the contract as a defense to the Webcor claim.
The owners objected, arguing that Civil Code §3123 provided that the value of the Mechanics Lien was the lesser of the contract amount or “the reasonable value of the labor, equipment, materials or services” provided to the job. The owners wanted to show that the Webcor contract value was overstated initially and then inflated by the settlement agreement.
The trial court ruled in favor of Webcor and precluded the owners from contesting the Webcor contract value and limited the owners to the reasonable value defense only, but not for any reason discussed by either party. Instead, the trial court found a case that it understood to hold that individual owners who are not in direct contract with the builder could only use the reasonable value analysis to dispute the Mechanics Lien.
The Court of Appeals reversed the trial court.
The Appel court held that the value of a Mechanics Lien is the lesser of the contracted amount or the reasonable value of the work that has not been paid. It does not matter that the owner of the property is not in direct contract with the contractor. As the Court of Appeals recognized, the statute says it is the lesser of the two values and does not make any distinction between contracting and non contracting parties.
On a more practical level too, the Court suggested that it would be grossly inequitable if, for example, the contract value was $80M but the reasonable value was $90M so that the underbidding contractor could get more from the owners than he could from the other contracting party.
Bottom line: be aware that Mechanics Liens need to be valued properly and the decision to pursue your Mechanics Lien should take into account the fact that it is not just what you say you are owed, but what the actual value is for the unpaid work. You need to be able to prove the claim, not just demand payment for it. Make sure you can!
Bio: John P. McGill is an attorney and advises and represents contractors and suppliers throughout the Bay Area and Northern California in both private and public work disputes as well as in employment, transactional, and administrative matters. He is the author of California Contractor’s DESKTOP GENERAL COUNSEL What You Need To Know About California Construction Law and he writes on construction issues at California Construction Law Toolbox www.californiaconstructionlaw.wordpress.com. Contact info: johnpmcgill@sbcglobal.net or jmcgill@archernorris.com or direct office 925-952 5403 & cell- 707 337 1932.
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