Restrict Payments For Your Job To Your Job

IN MANY STATES, liens and bond claims can be filed by anyone who can prove that he contributed labor, material or services (sometimes pretty remote services) that helped to property. Responsibility for resolving the problem created by these claims generally rolls downhill to the person lowest on the totem pole the subcontractor who hired them or who hired the guy who hired them and left them unpaid.

IN MANY STATES, liens and bond claims can be filed by anyone who can prove that he contributed labor, material or services (sometimes pretty remote services) that helped to “improve” property. Responsibility for resolving the problem created by these claims generally rolls downhill to the person lowest on the totem pole — the subcontractor who hired them or who hired the guy who hired them and left them unpaid. It is hard to stay on top of all these vendors, even in an ideal world, but it becomes much harder where the vendors play the system by shifting their invoices from job to job.

We frequently encounter this scenario: HVAC contractor hires Sheetmetal as its sub, who in turn buys materials from ABC Supply Co. for lots of different projects. HVAC pays all its bills on time and gets lien waivers from Sheetmetal, who pays all its suppliers with the money it gets from HVAC. What HVAC and Sheetmetal don’t know is that ABC Supply is applying that payment not to the invoices for HVAC’s job, but instead applying them to older bills owed by Sheetmetal for other jobs, maybe jobs where Sheetmetal’s customers haven’t paid it yet.

ABC Supply files a lien on HVAC’s job; the property owner tells the general contractor to make the lien go away; and the general contractor tells HVAC to make it go away. HVAC would like to force Sheetmetal to pay ABC Supply, but Sheetmetal doesn’t have the money and its check would bounce. HVAC is forced to pay twice, and the property of the owner who didn’t pay gets no lien.

Note that you have to watch out for two different kinds of problems: One is the supplier who insists on delivering to one jobsite the materials that really belong on another and aren’t used on the site where they are delivered. This is done in order to be able to later claim a lien for the project where the goods were delivered, even though those materials never went into that job.

In that case, there is at least some chance that HVAC could control what gets delivered to its site and notice that it was materials that weren’t appropriate to its job. In most states, the supplier has the burden of proving that its materials went into your project. If you can prove that you only have two chillers, 20 lavatories and 5,000 ft. of pipe, and that all of that has already been paid for, it will be a tough climb for a supplier to prove that its extra wares improved that property.

The other situation, the facts I’ve described in this column, is more of a challenge, because the supplier’s goods really did go into your job, and it really wasn’t paid for them (because it applied the money to another invoice). It had every right to apply funds received to its oldest outstanding invoices, which weren’t on HVAC’s job.

How can you avoid HVAC’s problem? The surest way is to get lien waivers from every supplier to subs and sub-subs. Another way is to pay by joint check, and/or require your own subs to pay by joint check, and note on the check exactly which invoices were being paid. That is a very good way of pinning down the supplier who sells on an “open account,” where multiple invoices and payments are floating around at the same time. It is tough to identify all the various vendors who furnish materials for your project, but you can probably cover all the significant ones.

The general law is that, absent an agreement, or special knowledge on the part of the supplier, the supplier is free to apply payments to any invoice it chooses and, if it has a policy of applying payments to the oldest invoices, no court will force it to do otherwise.

To protect jobs you are working on from liens or bond claims that in truth belong on other non-paying jobs, it is not a good idea to agree to let a supplier apply your payments to the oldest invoices. The vendor should agree to apply the payments from one job to the invoices associated with that job.

Even without such an agreement, however, suppliers are human. If a check notes on it that it is for payment of Invoice No. 12345, then the vendor has a choice of accepting the check according to that condition or sending the money back. I’ve been practicing law for a long time, and I very rarely see checks go uncashed.

Susan McGreevy is a partner at Husch & Eppenberger, Kansas City, Mo., can be reached at 816/421-4800, or e-mail to [email protected].

TAGS: Lavs Law