Mechanics lien laws are meant to be fair and just to all parties on a construction project. It’s common to believe that these are drafted to benefit only lower tier parties. However, there are some provisions that are meant to protect the owner or project manager in case there are any wrongdoings on a project. The Florida proper payment defense is meant to protect owners from bad faith GC’s, but in certain situations, it could work against unknowing subs and suppliers.
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Mechanics lien principles
Mechanics lien laws are drafted and designed to level the playing field for subs and suppliers. The basic gist is that the law will grant certain rights and actions against the owner and their property, regardless if they have privity with the owner. Privity is legalese is that there is a contractual relationship. Mechanics lien laws bridge the gap between lower tiered subs and suppliers and the parties benefiting from the improvements.
Anyone in the construction industry is familiar with the difficulties in the payment chain. Cash can get tied up, dispersed improperly or worst-case scenario, pocketed. As a measure to protect good faith owners that have dutifully paid and complied with all the relevant mechanics lien requirements, the Florida legislature has enforced the “proper payment defense.”
Florida proper payment defense
Florida Stat §713.06 sets out what is known as “proper payments.” These are the required practices that comply with the Florida mechanics lien laws. It states that
“those who comply with the provisions of this part, the total amount of all liens allowed under this part must not exceed the amount of the contract price fixed by the direct contract.”
This Florida proper payment defense was brought up in a 1972 case called Alton Towers, Inc. v. Coplan Pipe & Supply Co. the court stated that “where an owner fulfills all the duties the mechanics lien law places on him, his liability for all lien claims cannot exceed the contract price.”
As long as they comply with all the lien law requirements, such as Notice of Commencement, releasing payment once lien waivers are received, etc, their liability to subs and suppliers is capped at the original direct contract price between the owner and the GC. This seems straightforward, but things can get complicated when dealing with an unscrupulous GC.
For more information on Florida lien waivers:
Forged lien waivers left subcontractors with no recourse
As stated above, this statute seems reasonable but can have some serious consequences. There was a case, Continental Concrete v. Laks at La Paz, which illustrates how this proper payment defense can work against subcontractors.
GC was forging subcontractor signatures on lien waivers
In this case, there was a GC who was giving the property owner lien waivers from his subcontractors in order to have payment released by the owner. The issue here was that the GC was forging the signatures of his subs. Once he received the funds he paid some subs and, in other instances, pocketed the cash. After hearing of repeated complaints of late payment from the subs, the GC was removed from the project.
The owner decided to finish the project on his own. Unfortunately, the project cost over $60Gs more than the original price in the contract with the GC.
At the end of the project, a sub who had still yet to receive some payments recorded a lien and filed suit to enforce it. The owner defended the claim by invoking the proper payment defense. He stated that he paid anytime a lien waiver came his way, and he had no way of knowing the signatures had been forged.
The owner complied with lien requirements and paid more than the original contract price
On the surface, this seems like a perfect scenario to use the proper payment defense. The owner complied with all of his requirements, but the subs were still not getting paid. In this scenario, a sub would file a lien and his recovery amounts would be limited to the contract price. Not so fast. Remember, it cost the owner $60,000 extra to complete the project.
Since the owner ultimately paid more than the original contract price and followed all the mechanics lien requirements, the sub was left unpaid. It was determined that since it was the sub who extended credit to the GC, the onus was on them to eat the costs.
This is a difficult situation, and unfortunately, there’s no clear cut answer on how to avoid a problem like this. But here are a few things that could help avoid issues such as this before they arise.
It’s in your best interests to establish clarity early on of how and when funds are supposed to be distributed. Sound credit policies can help decide how much and how long you are willing to extend credit to your clients. Accordingly, it’s important to have clear guidelines to the payment terms in the subcontract and when funds are to be released.
The more open communication on construction projects., the less likely abuses will occur. Always take a proactive approach, especially when it comes to lien waivers. Whenever you sign a lien waiver, be sure you actually exchange it for payment. And if payment doesn’t come promptly, it’s no time to be shy. Contact the owner and voice your concerns, or send a Notice of Intent to Lien. Whatever route you decide to take, just be sure your payment problems are communicated to the owner as early as possible.