Why Contracts Undermine Subcontractor Protection
At ENR’s “Risk Summit” last month in Dallas, the editors asked my panel to ponder why Texas subcontractors weren’t “dancing in the streets” in light of seemingly favorable laws such as prompt- payment statutes, retainage restrictions and limits on indemnification. While the panel focused on Texas, the topic is relevant throughout the U.S., and I’ll explain why. Every state has a mountain of protections for the purpose of benefiting construction participants at the bottom of the contracting chain.
These protections can be traced to 1791, when Thomas Jefferson introduced the nation’s first mechanics’ lien laws in Maryland. In doing so, he laid the foundation for a uniquely American policy that has spread throughout much world commerce: If you provide labor or materials for another’s benefit, you should not bear the risk of non-payment.
Over 200 years of legislative action supports this stance; lien laws are protected in all 50 states, fund misappropriation is criminally prosecuted, and the U.S. Dept. of Labor enforces compliance with the Fair Labor Standards Act to make sure workers are paid.
Even with these protections, political activists are still pushing for more progress in this area. One example is President Obama’s SupplierPay initiative, and another is the debate over overtime requirements and the “livable wage.”
The reason subcontractors aren’t “dancing in the streets” is another American policy: the freedom of contract. Parties to a contract are generally allowed to agree to any terms they want. And, in response to the statutory protections subcontractors should enjoy, general contractors, developers, lenders and sureties load construction contracts with provisions to push financial risk back down on the subcontractors. These include “no lien” clauses and, just in case a contractor is required to pay before receiving payment, “pay when paid” and “pay if paid” clauses.
As court decisions and legislation invalidate these restrictive, risk-shifting clauses, other ways to saddle subcontractors with a construction project’s financial risk immediately spring up in their place. And so the pattern is repeated: A law protects subcontractors against a risk, owners and general contractors shift that risk back onto the subcontractor through contract, and then the risk-shifting contract eventually is mitigated or invalidated by the courts.
The construction industry has a pervasive cultural acceptance of shifting risk to parties with less
leverage, even when policy and law disallow it. This phenomenon is perhaps best examined through the mechanics’ lien, the most powerful tool in a subcontractor’s belt to avoid financial risk-shifting.
The laws protecting subcontractors from risk-shifting and non-payment, especially mechanics’-lien laws, are so voluminous, cumbersome and fragmented that they are rendered virtually unusable, especially for subcontractors with projects in multiple states. Further, a lot of what industry people believe about liens is incorrect.
The second problem is equally thorny. Liens and similar remedies are powerful tools that entangle the very parties with whom the subcontractor must work and rely on for both payment and additional work. Worry about angering upper-tier parties causes subcontractors to walk on eggshells or even forfeit rights, whether by action or inaction. More laws, better laws and clearer laws are not the answer. What is keeping subcontractors from dancing in the streets is a cultural problem, not a legal one.
Companies don’t enter projects intending to out-leverage other participants. They wind up there because they are hyper-paranoid about their own risks and believe they need to “stay ahead” of the other project participants.
The solution to construction payment is to figure out what triggers firms to go from good intentions to maximizing leverage. Despite their baggage, mechanics liens are not meant to torment lenders, property owners and general contractors. They are meant to get companies what they are due.
Transparency and a commitment to fair payment can go a long way or the cycle of litigation and legislation can continue. What direction will your next project take?
Scott G. Wolfe Jr. is the CEO of zlien, a platform that optimizes the exchange of preliminary notices and waivers to increase the ease and fairness of exercising lien rights in the construction industry. He can be reached at email@example.com.