Revisions to the Pennsylvania Mechanics' Lien Statute
Pennsylvania's mechanic's lien statute has recently undergone major revisions which will go into effect on January 1, 2007. The new statute will provide more rights to subcontractors and suppliers and will make doing business in Pennsylvania less risky than it is under the current lien statute.
There are several new features to the new statute, but the two most important are the extension of lien rights to lower tier contractors and suppliers and the limitation on owners and general contractors to be able to waive lien rights of lower tier contractors and suppliers.
Under the current lien statute, lien rights only extend to general contractors and subcontractors or suppliers who have a direct contract with the general contractor. If your contract is with a subcontractor, you are too "remote" and do not have lien rights. The new lien law will go one tier lower. Sub-subcontractors and suppliers to subcontractors will have lien rights.
Perhaps the harshest feature of the current lien statute is the ability of owners and general contractors to waive lien rights of lower tier contractors. This will no longer be the case after January 1, 2007. Lien waivers are going to be void as against public policy except in a few narrow circumstances. Lien waivers will still be permitted when given in exchange for payments received. Contractors and Subcontractors will also be able to waive lien rights on residential projects if the contract between the owner and the general contractor is less than one million dollars. Subcontractors will be able to waive lien rights on all projects if the general contractor posts a payment bond to cover the value of the labor and materials provided.
The time limit for filing a lien claim will be extended from four months to six months after completion of the lien claimant's work. Written notice of the filing of the lien claim must still be served on the owner within one month after the lien claim is filed. An Affidavit of Service of this notice, or the acceptance of service, must still be filed within twenty days after service setting forth the date and manner of service.
Under the current statute, a contractor performing "alteration or repair" work must send a separate preliminary notice. The new statute does not require such a notice. What is still required, however, is formal notice to the owner of a claimant's intention to file a lien claim at least thirty days before the lien claim is filed.
The new statute also changes the priority scheme of mechanic's liens compared to mortgages. The new law states that a mechanic's lien claim is subordinate (lower priority) to both purchase money mortgages and open-ended mortgages, apparently no matter when these two mortgages are filed. Thus, the current rule no longer applies that a lien for "erection and construction" has priority from the time that visible work on the project commenced and would have priority over any mortgage filed after this time. Further, given the broad language of the revisions to the statute, purchase money mortgages or open-ended mortgages filed after a lien claim appear to have priority over the lien claim.
Otherwise, the priority for lien claims based on "erection or construction" or "alteration and repair" versus other mortgages or liens are maintained. Liens for "erection or construction" work are effective as of the date of visible commencement of work on the ground. Liens for "alteration or repair" work are effective as of the date the lien claim is filed.
The new lien statute will afford greater protections to subcontractors and suppliers, which in most case did not have lien rights in Pennsylvania. As with any new statute, the court system must still give us clear guidance on the applicability of the statute.
SYNOPSIS OF ESCHBACH CASE
A case by the name of Eschbach v. Northwestern Human Services, Inc., et. al. was recently decided by the Pennsylvania courts. This case involves issues that subcontractors and suppliers regularly face -- "pay if paid" clauses in construction contracts and prompt payment statutes.
Eschbach was a masonry subcontractor to CSI, who was the general contractor on a project. CSI failed to pay Eschbach for the masonry work supplied to the project, so Eschbach sued CSI for nonpayment. CSI responded to the lawsuit by claiming that the subcontract between the parties contained a "pay if paid" clause, and that since CSI had not been paid by the owner, CSI was not liable to Eschbach.
The lower court agreed with CSI that the subcontract document contained an express "pay if paid" clause. The court also held that Pennsylvania's Contractor and Subcontractor Payment Act ("CASPA") created a "pay if paid" rule. Since CSI had not been paid by the owner, CSI was not liable to Eschbach.
The CASPA contains a "prompt pay" statute, stating that a general contractor must pay a subcontractor within fourteen days of receipt of payment from the owner. Courts will generally construe such language to be a timing mechanism for payment rather than a condition of obligation. In other words, courts usually interpret such language to mean that a contractor must pay a subcontractor within so many days after payment from the owner. A timing clause does not mean that the general contractor does not owe the subcontractor any money until the general contractor gets paid from the owner.
The case was appealed. This appeals court agreed with the lower court's decision, but only on the basis of the express "pay if paid" clause in the subcontract. The appeals court did not base its decision on the CASPA, and it did not comment one way or another on the lower court's interpretation of that statute.
The lower court's decision in the Eschbach case is unusual in finding a "pay if paid" provision in the prompt payment statute. The appeals court did not comment on the lower court's interpretation of the CASPA statute, and it is unclear where that leaves us. It is possible that other Pennsylvania courts may agree with the lower court's interpretation of the CASPA. It is also possible that no other courts will agree with the lower court. The Eschbach case may just be an unusual decision that carries no weight. Hopefully the courts will give us clear guidance on this issue in the future.
DEFENSE OF PAYMENT FOR SURETIES ON PUBLIC PROJECTS IN PENNSYLVANIA
Contractors do not have mechanic's lien rights on public projects. The federal Miller Act and various state "Little" Miller Acts were created to protect subcontractors and suppliers on public projects by requiring that the general contractor provide a payment bond. An unpaid subcontractor or supplier can look to the general contractor and/or its bonding company for payment if the subcontractor or supplier's customer does not pay them.
Most Miller Acts have no "defense of payment." A general contractor can be forced to pay a sub-subcontractor or a supplier to a subcontractor, even if the general contractor owes no money to the subcontractor. This is not the case in Pennsylvania. There is a "defense of payment" in Pennsylvania's Little Miller Act. Sub-subcontractors and suppliers to subcontractors will not be able to force payment on a bond if the general contractor has already paid its subcontractor, even if there were no problems with labor and/or materials provided.
This substantially adds to the risk in supplying labor and materials to public projects in Pennsylvania. Suppliers on public projects must carefully evaluate the creditworthiness of their customers and notify general contractors early of signs of trouble. This early notification may keep the general contractor from paying its subcontractor or may lead to a joint payment arrangement.