What right does a general contractor have if a sub factors an invoice and does not pay suppliers who have lien rights?

3 months ago

We were notified by a factoring company that a subcontractor had factored an invoice we owed the subcontractor. The payment terms were with in our payment policy period. The subcontractor took the funds from the factoring company and did not pay his suppliers or his subcontractors. We are now getting demand letters for the factoring company to pay the invoice however we are not paying them but using the mobey to pay the outstanding invoices the subcontractor owes. Do I have to pay the factoring company or offest the payments from what the subs owes?

CEO Levelset

You’ll want to be careful with this situation as there are a lot of important details here. You may want to consult with a construction attorney in Colorado if it gets too tangled up, or if you run into trouble with the factoring company.

Good news: You only have to pay for the work once

The good news for you here is that you only need to pay for work once. If the subcontractor didn’t pay their supplier, you aren’t obligated to both parties for the same materials.  That’s the good news, but you need to be careful in how you handle the situation to make sure you don’t wind up paying twice (because that is definitely possible).

You have financial obligations to the subcontractor/factor

The subcontractor and you have a contractual agreement, and that agreement requires you to pay the subcontractor for the materials. The subcontractor has a separate obligation for the material supplies.  That’s your starting point.  The subcontractor (and factor) have pretty good arguments against you that they are supposed to be paid the money here. They may argue that they need the money from you to pay the supplier, etc.

Things are easier for you if a lien was filed, actually

If a mechanics lien was filed, things actually get a bit easier and more clear for you. If a lien is filed, then you have legal obligations to the supplier that are clear and unavoidable. From there, you can pay the supplier lien and then deduct that from the subcontractor’s debt, which will pass onto the factoring company.

Otherwise, consider a joint check / lien waiver / some mutual agreement

Otherwise, to insulate yourself against the risk of the supplier filing a lien after you pay the subcontractor, you may want to consider a joint check to the factor + supplier, or some other mutual agreement like this.  Or, require the factor to provide you with a lien waiver demonstrating that the material supplier has been paid (you probably have this right within your contract with the sub, which the factor assumes).

Conclusion

The factor’s rights are pretty synonymous with the subcontractor’s rights. You may need to juggle some of the contractual rights & obligations between you and the sub (i.e. I don’t know what those are), and you ultimately need to make sure that supplier gets paid!

Good luck.

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