Financial risk shifting is nothing new in construction. A collaborative approach results in more efficient projects and fewer headaches, but many companies prefer to play a game of “liability hot potato” while claiming they are “all about relationships.”
Some of the traditional risk-shifters occur when a construction contract is first created and can include no lien clauses, pay when paid, and pay if paid clauses. (Though if you’ve been reading the Construction Payment Blog, you’ll know that these types of contract clauses have been limited over time.)
There’s another risk-dodging measure we’ve come across, too – a while back, a general contractor told us that when they’re starting up a new project, they inform the subs and other vendors on the project that they won’t do business with companies who send preliminary notices.
Wow! Is a general contractor refusing to accept a preliminary notice just a creative risk-shifting method (albeit a pretty harsh one)? Is refusing to accept a preliminary notice even legal? Not necessarily. Read on for more.
Can A General Contractor Refuse Your Preliminary Notice?
As always, Levelset recommends you send preliminary notice on every project, not just on problem projects, and even in cases where notice is not required. But sometimes this decision is automatic – in many states, preliminary notice is mandatory to preserve lien rights. So if you’re working on a project in a state that requires notice be sent to maintain lien rights, but the general contractor on the project says that they won’t work with a party who sends notice, what are you supposed to do?
In states where notice is required, a general contractor will (likely) not be able to refuse the notice. Effectively, prohibiting notice would be instituting a no lien clause, and we know how states feel about these.
Further Reading for Subcontractors
A GC Will Face Plenty of Potential Risk By Stifling Lien Rights
Levelset never recommends filing a fraudulent or exaggerated lien. That being said, if a contractor has impeded a claimant’s ability to file a lien, the best option may be to go ahead and file the lien anyway. A GC could potentially face liability themselves in the vein of unfair trade practices and fraud if it’s proven that they tried to prevent a contractor from filing an otherwise valid mechanics lien, since in many states, forcing a subcontractor to give up their lien rights will be out of line with the state’s mechanics lien laws.
Filing a lien when it’s known that the notice requirements have not been met is a risky play, though, and a local construction attorney should be consulted before making that move.
Sending Preliminary Notices Builds Relationships
General contractors shouldn’t see a preliminary notice as a threat. Rather, preliminary notice is a great tool to use at the outset of the project. When a GC receives such a notice, especially early on, they should understand that their sub or other vendor is proactively opening a line of communication. Problems often come up throughout a project, but if the GC and a sub have already begun building a rapport, it will be easier to place trust in each other that a dispute will be resolved quickly and cleanly.
Further Reading for General Contractors
So, if a GC claims that they don’t deal in preliminary notices because they’re relationship oriented, remember that the relationship should go both ways. If the GC tries to ditch liability before a project has even hit its stride, can that GC be trusted if issues begin to arise later on in the project, whether payment-related or not?
If the GC says preliminary notice won’t be accepted – send it anyway. If a dispute eventually pops up, your position will undoubtedly be better off if you’ve sent notice, even when the GC doesn’t want it.