WHAT TO DO WHEN YOU ARE NOT BEING PAID

The most common issue I confront as a construction attorney is what to do when my client is not being paid. The standard approaches include sending a demand letter, making a demand for disputed funds to be placed in escrow in accordance with the prompt payment statute, and, of course, filing mechanic’s liens and/or bond claims. The larger issue becomes what to do when my client can no longer to perform its work without payment.

As a general rule, a contractor is better off completing its work, and then fighting about the monies due, as opposed to walking off the job. While it is true that there are Connecticut cases which hold that a contractor is excused from finishing its work if progress payments are not made when due, but reliance on such cases is fraught with potential problems.

If you ever forced to litigate, you want to be viewed as the one wearing the white hat. You want to be the injured party that is as pure as the driven snow. If at all possible, you do not want to give the other side any arguments to raise. Thus, if you walk off the job for nonpayment,

Remedial Work Does Not Extend the Deadline to Commence an Action on a Payment Bond

As most contractors are aware, if they are not paid for their labor, materials, and/or services, they can strengthen their position prior to filing a lawsuit by filing a mechanic’s lien, or by making a claim against the project’s bond claim. Of course, both options are not generally available. Typically, the choice is based upon whether the project is private or public. On private projects, a contractor (or supplier) is allowed to gain a security interest in the property by filing a mechanic’s lien. On public projects, federal and local governments passed laws requiring the general contractor on public projects to post “payment bonds,” which guarantee the payment of those who supply labor, materials, and/or services to the property. In other words, because governments were not willing to let public lands be subject to foreclosure, on public projects, statutorily required payment bonds were created to take the place of mechanic’s liens. Of course, private owners may require general contractors to post payment bonds on private projects as well, but this post only addresses the statutory payment bonds required on public projects.

The law that requires payment bonds on federal projects is known as the Miller Act. The various state laws that require payment bonds on state projects are often referred to as “Little Miller Acts.” The requirements are the Miller Act and the various Little Miller Acts are generally similar.

A Recent Superior Court Decision May Affect Subcontractor/Supplier Mechanic’s Liens

In a recent decision, the Superior Court discharged the mechanic’s liens of several subcontractors, because the general contractor had already filed a lien for the unpaid contract balance. Wegrzyniak v. Hanley Constr., LLC, WL 5706192 (Conn. Super. Ct. Oct. 30, 2017). Insofar as any substantial construction project will involve a general contractor, subcontractors, sub-subcontractors, and suppliers, there are obviously many potential lien claimants. Nonetheless, the court said that “[f]or good reasons, the mechanic’s lien statutes don’t permit multiple liens,” and with regard to the subcontractor whose lien included a claim for extra work, the court said that “[w]ithout an agreement to support the additional work…, [the subcontractor’s] lien must be discharge.” Id. In light of the foregoing, Wegrzyniak may stand for the proposition that subcontractors, sub-subcontractors, and/or suppliers are precluded from filing mechanic’s liens when the general contractor files a mechanic’s lien covering the entire project, but, in my opinion, subcontractors, sub-subcontractors, and suppliers should continue filing their own mechanic’s liens.

To summarize the reasoning of the Wegrzyniak decision in plain English, because the court understood that the property owner should not be held liable for more than the amount it agreed to pay the general contractor,

A Mechanic’s Lien: Something Simple That’s Been Made Complicated

One of the first things I was ever taught about mechanic’s liens is that the legislation’s original intent was for a contractor to be able to perfect a mechanic’s lien without the aid of an attorney. If that’s true, the system is not working as intended. Of course, that is not surprising given the complicated legislation and its arguably inconsistent interpretation.

A mechanic’s lien is unique insofar as it allows a contractor to obtain an interest in real property without requiring any kind of hearing or notice. As long as the lien documents are properly prepared, recorded, and served, the lien is in place. In addition, the fact that mechanic’s liens have priority dates that relate back to the first day that the contractor performs work and/or supplies materials, mechanic’s liens that did not exist when a mortgage was given or the property was sold can appear on the land records after such transactions and take priority over an earlier filed mortgage and/or encumber property owned by someone who was not the property owner at the time the work was performed, materials were supplied and/or services were rendered.

Of course, reading the statutes is not sufficient to completely understand mechanic’s liens.

A Recent Supreme Court Decision Found an Owner of a Construction Company Personally Liable to the Owners of a Project

As most people are aware, one of the benefits of doing business as a corporation or limited liability company is that, generally speaking, the owners of the company cannot be held personally liable for the company’s debts. The exception to that general rule is that a court may pierce the corporate veil and hold the company owners personally liable if the company owners are found to have improperly used the corporate form, or have used the corporate form to commit wrongful acts. Nonetheless, even a cursory of the caselaw indicates that plaintiffs do not often prevail when they are attempting to pierce the corporate veil.

The statement of the law with regard to piercing the corporate view is quite simple. In All Phase Builders, LLC v. New City Rests., 2011 Conn. Super. LEXIS 1793, *20-21, 2011 WL 3483368 (Conn. Super. Ct. July 12, 2011), the court ruled:

“In order to pierce the corporate veil, a plaintiff must plead and prove that the corporate shield can be pierced under either the instrumentality rule or the identity rule. The instrumentality rule requires… proof of three elements: (1) Control …; (2) that such control must have been used by the defendant to commit fraud or wrong …;

Contractual Time Limits for Providing Notice of Claim Must be Taken Seriously

The Connecticut Appellate Court recently issued a decision that should cause every contractor some concern.  In J. WM. Foley Inc. v. United Illuminating Co., 158 Conn. App. 27 (Conn.App. 2015), the Appellate Court upheld a decision that denied a contractor’s $4.7 million delay claim because the contractor did not provide proper notice of the claim within the 10 days required by the contract.  The case is disconcerting because the court’s decision appears to be based upon the contractor’s failure to strictly comply with the contract’s notice provision.  There is no discussion indicating that the owner was harmed or prejudiced by the delay in receiving notice of the claim.  Moreover, the decision acknowledges that the contractor had provided the owner with notice of events giving rise to the claim.  In fact, despite denying the delay claim, the trial court awarded the plaintiff over one million dollars for its direct costs, which arose out of the same facts as the delay claim.

 

The project underlying the dispute in J. WM. Foley Inc. was the construction of a utility pipeline.  The parties’ agreement stated that the contractor was expected to encounter subsurface obstructions and that the contractor would be entitled to additional compensation associated with same. 

Only the “Owner” may seek Judicial Discharge of Mechanic’s Liens

The Connecticut Superior Court recently decided a case of first impression regarding the right to file an application for discharge of mechanic’s liens.  The court in Grade A Mkt., Inc. v. Surplus Contrs., LLC held that a lessee did not have “standing” to file an application for discharge of mechanic’s liens and dismissed the tenant’s application.  Grade A Mkt., Inc. v. Surplus Contrs., LLC, 2015 Conn. Super LEXIS 1342 (Conn. Super. May 26, 2015).  In layman’s terms, “standing” is the right to have the court decide your case.  The Grade A Mkt decision is interesting because it limits the ability of a tenant to obtain a discharge of mechanic’s liens even though the tenant’s lease with the owner may require the tenant to obtain a discharge of mechanic’s liens filed by contractors performing work for the tenant.

Mechanic’s liens are a statutory right that the legislature created to provide contractors and/or suppliers that furnish labor, materials, and/or services to a property with security for the alleged debt but mechanic’s liens were not intended to prevent the free transfer of property rights.  For that reason, the statutes provide a few different mechanisms by which an appropriate individual or company may obtain a release of the mechanic’s lien. 

Recent Supreme Court Case Teaches Important Lessons

It is no secret that public works construction is a difficult business.  On any given project there are innumerable ways that things can go wrong. With any project involving excavation and underground utilities, encountering changed conditions should not be a surprise.  Of course, such changed conditions are not the contractor’s responsibility.  What is the contractor’s responsibility, however, is providing the public owner with proper notice of its claims in accordance with the subject agreement.

One of the reasons public works construction projects are more onerous than their private counterparts is because public owners rarely negotiate contract terms. Contracts that are slanted significantly in the public owner’s favor are the norm.  Thus, as the contractor in a recent state Supreme Court decision learned, it is vitally important to read the contract and abide by its terms.

One of the lessons from Old Colony Cosntr., LLC v. Town of Southington, 316 Conn. 202 (Conn. April 21, 2015) is that general assertions of entitlement to damages and/or additional contract time is not sufficient when the contract requires more detail.  During the long duration of the project, the contractor in Old Colony repeatedly indicated that each problem that occurred impacted its schedule and costs. 

Public Owners Have Substantial Discretion in Determining the Lowest Responsible Bidder

In a recent decision, the Appellate Court reminded us that it is the lowest responsible bidder and not merely the bidder that submits the lowest price that shall be awarded the contract for a public project.  In Good Earth Tree Care, Inc. v. Town of Fairfield, 2014 WL 3408914 (Conn.App.), 2 (Conn.App., 2014), the plaintiff brought an action against the Town of Fairfield (the “Town”) because of the Town did not award the plaintiff the contract to operate the Town’s leaf and yard waste facility (the “Facility”) despite the plaintiff having submitted the lowest bid.  The lawsuit was dismissed after the plaintiff presented its evidence because it failed to prove that the Town engaged in “fraud, corruption, or favoritism.”  Based upon the facts of this case, however, it is easy to understand why the plaintiff thought that there might have been an element of favoritism involved.  Specifically, the Town awarded the 5 year contract to the contractor that had operated the Facility for the previous five years at a higher price than the plaintiff had offered.

In the private sector, it is perfectly permissible for an owner to say that it is willing to pay a familiar entity a higher price than a new company if the private company is happy with the existing company’s performance but public owners do not have that type of discretion. 

With Payment Bond Claims, Different Rules Apply to the Bond Claimant and the Surety

As previously discussed in this Blog, Conn. Gen. Stat. § 49-41 requires each general contractor on a public works projects valued over $100,000 to post a payment bond that guarantees payment to the general contractor’s subcontractors and suppliers.  The payment bond also guarantees payment to each subcontractors’ sub-subcontractors and suppliers.

The procedure by which such subcontractors, sub-subcontractors, and/or suppliers may make claim against such payment bonds is described in Conn. Gen. Stat. § 49-42.  With the exception of claims for retainage, the statute requires those making claim on the payment bond to submit their “notice of claim” within 180 calendar days after the last day that it worked and/or supplied materials.  The statute then provides the surety that issued the payment bond with 90 calendar days to pay or deny the claim.  Until recently, both time provisions were mandatory.  See Barreira Landscaping & Masonry v. Frontier Ins. Co., 47 Conn. Supp. 99, 110, 779 A.2d 244, 252 (Super. Ct. 2000)(holding that both the notice of claim and the surety’s response both much be made within the time specified by statute.)

With regard to the 90 day time limit, the court in Barreira Landscaping &