WHEN YOU HAVE IT AND WHEN YOU DON’T
By John P McGill, Special Counsel at Archer Norris
Mechanics Liens, Stop Notices, and payment bonds are three of the most effective and powerful tools that contractors have to assure they get paid on a construction project. Mechanic Liens are only available on private works projects and payment bonds are more typically found on public works projects, but all three remedies are important options that all contractors need to understand and use. If you are one of the statutorily authorized parties, you have extremely important rights that you can assert.
The threshold requirements are the same for all three and are simple enough to comply with: you need to have sent a Preliminary Notice (private works especially) and you need to be properly licensed for the entire time you are performing the work (critical on every construction project). With those two prerequisites met, you have your ticket for the show, but you still may not get in the door. Your status and relationship to the other parties, as a subcontractor or as a supplier, and depending on what you do and who you do it for, will determine if you can enforce these important statutory remedies.
Sometimes that distinction-subcontractor or supplier- can get a bit fuzzy. How do you tell the difference? In the case of Eggers Industries v Flintco Inc that’s exactly what happened and the court provided an excellent explanation of how to distinguish a subcontractor from a supplier, and when and how it can determine your rights to assert Mechanics Lien, Stop Notice, and/or in the Eggers case, a payment bond claim. The facts in Eggers are important to understanding the distinction and the implications of the distinction.
The project was a public works project at UC Davis. Flintco was the general contractor and subcontracted with Architectural Security Products (ASP) to provide more than 280 doors for the project. The doors were custom doors; that is, they had certain specific criteria and were not simple off-the-shelf products. ASP contracted with Eggers to manufacture the doors. When ASP did not pay Eggers the entire contract amount, Eggers filed a claim against Flintco’s payment bond. ASP also went bankrupt so the only recourse for Eggers was the payment bond.
Flintco and the payment bond surety defended against the claim by insisting that ASP was not a subcontractor but only a supplier because all it had was contract to provide the doors. Therefore according to Flintco, Eggers was not entitled to make a claim on the bond because Eggers was only a supplier to a supplier (ASP) and suppliers to suppliers have no lien or bond rights. Eggers, of course, insisted that ASP was a subcontractor and that it (Eggers) was a supplier to a subcontractor, and therefore it did have payment bond rights. The trial court and the court of appeals agreed with Eggers.
The question that had to be answered in the Eggers case was: What’s a subcontractor?
The answer turned on what the contract between ASP and Flintco called for ASP to do. The critical fact was not so much what ASP did, but what ASP agreed to do. It did not matter that ASP did not itself manufacture the doors that it had agreed to supply; what mattered was that it agreed to provide the doors in the first place and that the doors were a substantial portion of the entire work of improvement. As the court wrote “It is the agreement to provide part of the construction, not who actually performs that part of the construction, that gives one “charge of” that part of the construction and thus makes one a subcontractor.”
According to the California Supreme Court, a subcontractor is “one who agrees with the prime contractor to perform a substantial specified portion of the work of construction, which is the subject the general contract, in accord with the plans and specifications by which the prime contractor is bound, has “charge of the construction” of that part of the work of improvement and is a subcontractor although he does not undertake to incorporate such portion of the projected structure into the building.”
Therefore because ASP remained in charge of- responsible for- the production of the doors for the project, it was by definition, a subcontractor. Because ASP was a subcontractor, Eggers could still be a supplier and had payment bond rights to assert. The Code provides that a supplier to a subcontractor has such rights; a supplier to a supplier does not. Eggers prevailed because of ASP’s status as a subcontractor, which also determined Eggers’s rights as a supplier. The subcontractor does not necessarily need to perform the work; it merely needs to agree to get the work accomplished. Any suppliers or others that it contracts with to perform the work will also have lien and bond rights as a result. Conversely, if the supplier buys materials from another supplier, that remote supplier does not have any such rights. Bond, lien and stop notice rights all depend on where you are in the chain of commerce.
The Eggers case resolved a payment bond dispute but the same analysis would apply for determining Mechanics Lien and Stop Notice rights. By Code, there are only certain specific and statutorily defined groups that have these rights: contractors that have direct contracts with the owner, subcontractors and suppliers to subcontractors with contracts with the General or Prime, and subcontractors to subcontractors have lien rights; suppliers to suppliers do not. Depending on what your contract is for, and who it is with, will determine whether you have statutory rights. Make sure you understand that relationship so you can take appropriate steps to protect your rights, whatever side of a dispute you may find yourself on.
Bio: John McGill represents general contractors and subcontractors in contract, claims, employment, and transactional matters in before administrative agencies and in judicial proceedings as well as in mediation and arbitration. He is general counsel for a public works general contractor in Novato and Special Counsel at Archer Norris in Walnut Creek. His contact info is: jmcgill@archernorris.com - direct office - 925-952 5403 & cell- 707 337 1932.
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