Justin Sweet

Recently I saw a blurb for a text that promises to pilot readers through the muddy shoals of mechanics’ lien laws. This exercise in puffery brought me back to my hostility to mechanics’ liens, those useless appendages to an already overcomplicated construction law.

I vented my aggression on these worthless, even dangerous, legislatively created creatures in a column I wrote for the Construction Lawyer, an American Bar Association journal. I thought that my attack on this sacred cow would bring a torrent of abuse. I expected bruising phone calls and e-mails or shrill calls for my removal from the journal. I could not have been more wrong. No volley of condemnation. Nothing, or almost nothing.

The closest I got was a mild-mannered rebuke in the buffet line at an ABA forum from an executive of the American Subcontractors Association. He asked me how subs would get paid without lien rights. I responded by suggesting that subs should not exchange their obligation to check on the creditworthiness of the people for whom they worked for the often uselessness of lien rights. More on that later.

The absence of a torrid attack caused me to reflect a bit. Maybe no one read the column. This is the constant nightmare of any author, particularly academic writers.

My ego would not permit me to believe this explanation. More likely, I thought, any reader who thought I was flat out wrong would not take the trouble to respond. They would yawn and content themselves with the observation that no one paid attention to professors.

The other reason, at least to me, for the horrific silence was that lien laws were so ingrained in American construction law that it was at best an attempt by me to show that I had read and absorbed Don Quixote—and that it pleased my ego to compare myself to the Man of La Mancha.

This sense of the uselessness of my attack was reinforced recently when I read an item about “no lien” contracts in Pennsylvania. I had always pointed to this practice to show that despite it, buildings did get built in Pennsylvania, just as they got built in other jurisdictions without such liens, such as Canada, the United Kingdom and the European Union. I saw no evidence that subcontractors in non-lien jurisdictions, the principal current supposed beneficiaries of such laws, had a higher rate of financial failure than their American counterparts.

Yet I was jolted out of my smug satisfaction when I read that Pennsylvania contracts were no longer “no lien” affairs, generated, I suppose, by the increased legislative attempt to bar or limit lien waivers. This legislative contract regulation showed the power subcontractors can muster in state capitals. Those who could benefit by lien waivers, inexperienced owners or “mom and pop” entrepreneurs, lacked the knowledge, experience and organization to rally opposition.

That is in the past. But let me explain why today I continue to despise these staples of American construction law.

Pablo Picasso

Lien laws were intended to develop the District of Columbia early in American history. Lien laws would give workers (mechanics’ liens) the confidence to work on construction projects by assuring them they would be able to collect by giving them lien rights, a security interest in the work they helped build.

Now we know that the principal beneficiaries are subcontractors, not construction workers. But no matter. More important, these laws can and do harm the supposed beneficiaries. Let me explain.

First, they mislead contractors, mainly subcontractors. The existence of liens can convince them that they need not do a careful job of checking on the financial strength of those who engage them.

I recognize that subs argue that they cannot deal directly with the real money source. They do not deal or contract with the owner.

The financial capacity of the owner is a serious problem to all who build. The 1997 American Institute of Architects model contract A201 (I have not yet reviewed the 2007 version) gave the prime the contractual power to request that the owner show financial responsibility. I have been told that owners often strike that clause as they resent any incursion into what they think is their own private business. But still, more can be done by subs and for that matter primes to protect the right to be paid. But reliance on liens is not one of them.

Before I elaborate on this I should recognize that some lien defenders say that liens are a close relative to the equitable lien concept created to avoid unjust enrichment. The courts of equity give a person lien rights if they have benefited another. But the lien claimant must trace his work into the property he has improved.

But let us be honest. Is there any serious argument that the lien laws require a serious tracing? To be sure the lien claimant must show that it has improved the property. But often work is considered “lienable” that clearly does not trace the benefit.

In any event whether the work is “lienable” is often a difficult issue. Much depends on the language of the lien laws and court decisions. (The law is terribly confused and unclear on this issue, another weakness of lien laws.)

More important, the likelihood that the lien will actually generate money is tenuous at best. There are many hurdles between asserting a lien and collecting any money. First, have all the technical requirements been met? Pre-lien notices? Filing on time and in accordance with the law? A way to get around any lien waiver?

(The real beneficiaries of lien laws are those rare legal experts, often not lawyers, who develop the skill to create a valid lien.)

Second, does anyone have priorities over the lien claimant, such as prior lenders? Even if the lien is valid, will there be any money left over after the prior claimants get paid? Even among lien claimants there may be more liens than money that can be gotten out of the property. Often unpaid subs do not have enough at stake to bid in and the foreclosure is controlled by those with bigger stakes, leaving lien claimants with nothing.

I recognize the threat of a lien may be a powerful tool for unpaid subs to get paid or have a bond put up to secure payment. But such threats not only depend on the likelihood of a pot of gold at the end of the rainbow, but on the likelihood that the person threatened will give in. It might work against an owner about to sell the improved property or against an inexperienced owner. But the construction world sees tough talk and bullying tactics as coin of the realm. Experienced operators in this world will not be impressed.

Maybe a lien threat can have some value now and then but surely not enough to plunge ahead with work without evaluating the creditworthiness of the person who hires you and using other protective measures.

Other methods can be used to protect contractors from the risk of not being paid, such as stop notices, treating the funds as trust funds and posting bonds. If none seem promising it may be better to simply factor unpaid work into the cost of doing business. Abolition of mechanics’ lien laws would not leave contractors worse off. It would even make them better off as they would not rely upon such a flimsy method.

I know I have made many factual observations that can be challenged, but I have thrown down the gauntlet at proponents of mechanics’ lien laws. I invite any defenders to accept the challenge!