Most boards of co-ops and condominiums spend a lot of time negotiating the terms of their contracts with general contractors; however, it is often subcontractors who do most of the work. Sometimes the Boards are not even aware of how much work they are doing. Despite this fact, their contracts, if they even have one, are the least thought out and the terms of their work are often very unclear. However, the legal issues that can arise from work by subcontractors can be profound for buildings and general contractors who have not been well-briefed by knowledgeable legal counsel.
When a co-op or condominium building hires a general contractor to renovate property, that company is legally responsible to the owner for completing all of that work. The contractor may go out and hire different subcontractors to help execute that work, but the prime contractor still remains liable for the entire project and the subcontractors are in turn liable to the general contractor, not to the client. They have what is called “privity of contract” with the general contractor. The general contractor also has privity of contract with the client.
Know Who’s at the Worksite
However, a subcontractor who has done work, with the knowledge and consent of the client, may file a mechanic’s lien, the same way that a general contractor can. The subcontractors presence on the work site is not generally a secret. In fact, owners should make it their business to be aware of the names and contact information of the subcontractors have been hired to perform some of the work. I usually make disclosure of this a provision in the contract between the general contractor and the building.
The general contractor is obligated to pay the subcontractor, even though the owner has been slow or late in paying him. Many a general contractor has tried to claim that he is not liable for paying subcontractors until he has been paid by the client, but that is not a legally correct position. In fact, a clause in a contract between a general contractor and a subcontractor in which the general contractor seeks to absolve himself of liability for payment until the client has paid him, is void as against public policy. There are also situations in which the general contractor has been paid by the owner, but for some reason has not paid the subcontractor. The best insurance for an owner that subcontractors have been paid is insisting on partial waivers of lien throughout the project and final waivers at the end.
The subcontractor can foreclose on that mechanic’s lien, however, he can only recover up to the amount that the general contractor is owed by the client at the time that the lien was filed. Thus, if a general contractor was paid in full for an application for payment and for some reason he did not pay the subcontractors, the subcontractors would not be able to file a valid mechanic’s lien, but they still could sue the general contractor for breach of contract.
The clerks who accept mechanic liens for filing have no way of knowing whether the general contractor has been paid in full or not. A mechanic’s lien may be accepted for filing, but if the property owner can show that the general contractor has been paid, that may be a basis for vacating the mechanic’s lien. Again, this is why waivers of lien and partial waivers of lien are so important.
If a general contractor has been paid for a requisition that includes work provided by subcontractors, he is considered to be holding that money “in trust” for those subcontractors and must pay them. The portion that is for the subcontractors is not his money. If he uses that money to pay his own men, to pay his own rent or to buy a new car, those “trust funds” can be traced and the general contractor can be liable for violating the trust fund.
Even if the general contractor is a corporation, he can be sued as an individual and required to give an accounting concerning how the money was spent—where it is, who was paid with it and why the subcontractors did not receive it. The subcontractors can start a mini-class action lawsuit as the beneficiaries of that trust fund.
It is now easier to bond mechanic’s liens than in the past. It is done by the court clerks, instead of by an application to a judge, with a hearing to determine the amount of the undertaking. The general contractor must show assets of at least 110 % of the amount of the lien to obtain a bond.
Don’t Forget About Insurance
If a subcontractor agrees to obtain general liability insurance naming the client and the general contractor as additional insureds, he must do so before any work has started. He cannot do demolition and purchase the policy a week later. If he does and an accident occurs, it may not be covered under the policy. The subcontractor may also be subject to a lawsuit for breach of contract for failing to obtain the coverage required under the contract with the general contractor. Sometimes subcontractors think they have purchased the appropriate coverage and they have not.
A general contractor can wind up paying workers compensation benefits for a subcontractor’s injured employee, if the subcontractor does not have workers compensation insurance. If property damage on a project has been caused by a subcontractor and the subcontractor is not insured or coverage is denied, there can be enormous repercussions because it may also not be covered under the general contractor’s policy either.
I always advise co-ops and condominiums to be concerned about these issues. General contractors should be equally concerned about having appropriate contracts with their subcontractors as they are with their own contracts with the buildings and not to just rely on a telephone call or a purchase order. Subcontractors should spend the time to have properly drafted contracts and owners and developers should know who is working on their projects and how to contact them if they need to.
C. Jaye Berger, Esq., is a principal at the Law Offices C. Jaye Berger
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