Just a few days ago, a new contributor to the Construction Payment Blog authored a review of the recent changes to North Carolina bond claim law, specifically the revisions to N.C. Gen. Stat. § 44A-27. That post did a great job of clearly setting forth the statutory changes and additions, and defining the stated reasons for the change. Unfortunately for North Carolina, however, the statutory revisions do not accomplish their task with nearly the requisite clarity, and in my opinion, do not actually accomplish the stated purpose at all.
Purpose of Recent Revisions to N.C. Bond Claim Law Was to Mitigate Double Payment Liability of General Contractors
Ostensibly, the purpose of North Carolina’s recent revisions to the bond claim law was to provide general contractors protection against double payment. In fact, the statute was only amended after a long period of lobbying to achieve that purpose. The revised statute creates two different protections to general contractors against the risk of double payment. The efficacy of these protections, however, is likely to be limited in practice, and is basically non-existent in theory. The goal of the statutory revision was to create double payment protection for general contractors.
If the goal of the statutory revision was to create double payment protection for general contractors, it would be easy to amend the statute to accomplish that task. Many states have similar protections in place for property owners on private or commercial projects – this is the difference between a “full-price” and a “unpaid balance” lien. Statutory language in “unpaid balance” states limits the amount of a valid lien to the amount still unpaid under the original contract. That is, the property owner is not liable for any amount over the contract price. If the property owner pays the general the full amount, and the general fails to pay the subs, those subs (and their sub-subs) are out of luck, no lien can attach. It would have been easy for North Carolina to provide clear and specific double payment protection by using similar language in their statutory revision. However, instead of revising the statute with precision to accomplish this specific task, the North Carolina legislature apparently attempted some sort of balancing act.
The Recent Revisions Merely Complicate N.C. Bond Claim Law
The practical result of the lien law revisions is only increased complexity in the bond claim scheme. The new version of N.C. Gen. Stat. § 44A-27 sets out several new requirements for parties up and down the project chain. The general contractor is mandated to provide a “project statement” to all subcontractors who, in turn, are required to pass the statement down to their sub-subs. Further, the general contractor is required to provide a copy of the bond within 7 calendar days of a request from a lower-tier party. Finally, all sub-subs are required, in some circumstances, to serve a “Notice of Public Subcontract” on the general contractor within a certain time period.
Each of these new requirements has an associated deadline, and some potential penalty associated if the deadline is missed. This creates a whole new tangled web of dates and consequences that people up and down the project chain must attempt to untangle. While this brings the public project rules more in line with the convoluted private project rules – I’m not sure that’s necessarily a benefit. Instead of formulating the new law in such a way that general contractors are clearly protected from double payment liability, the revised law sets out a bunch of requirements that may or may not lead to the general contractor being protected from being required to pay twice.
Let’s take a look at the new requirements one more time to see how they mesh together:
To preserve claims under the bond, every sub-sub is required to serve the general contractor with a “Notice of Public Subcontract” within 75 days of first furnishing labor and/or material to the project unless, 1) the claim is for $20,000 or less (for any amount over $20,000 the notice requirement only applies to the amount of the claim exceeding $20,000); or 2) the general contractor failed to deliver a copy of the bond within 7 calendar days of a written request from the claimant. Note that in situation 2) the requirement that the Notice be sent is not waived, only the 75-day deadline.
The Recent Revisions Provide Little Double Payment Protection to General Contractors
So, with all this new complexity, what is protection from double payment liability is gained by general contractors. Unfortunately for G.C.’s, the answer to that question is: very little. There is no double payment protection at all for the first $20,000 claimed by each remote subcontractor. For amounts over $20,000, there is only double payment protection in instances when the remote sub fails to give the required Notice within 75 days. Even in those situations, the protection only extends to amounts claimed for labor and/or materials provided more than 75 days before the service of the Notice, if the Notice was eventually given late, and only if the G.C. didn’t fail to give a copy of the bond within 7 calendar days of a written request from the claimant.
Not very much protection at all.
The “protection” provided by the revision is negligible. The statute does not make clear if the provision that the 75-day requirement is nullified on failure to provide a copy of the bond within 7 calendar days only applies when the request is made prior to the expiration of the 75-day period, or not. Until that is decided, a savvy sub-sub, who neglected to send Notice timely, can make a proper written request for a copy of the bond and hope that the G.C. fails to supply a copy within the statutorily required 7 days. If the G.C. fails to do so, the language of the statute seems to require the 75-day period to be waived.
In any even, the “protection” provided by the revision is negligible. In fact, there is no real protection given at all. If the sub-sub complies with the new statutory requirements there is literally nothing the general can do to escape double payment. This is not protection, it is merely a set of hurdles that must be cleared. Sure, they may trip up an unsuspecting sub-sub and “protect” the G.C. from the amount of that sub’s claim over $20,000 – but that is poor protection indeed. To me, actual protection against double payment would disallow claims that would necessitate double payment, not explicitly allow them if certain notice requirements are met.