We’re Not in Kansas (Minnesota) Any More

Category | Briefing Papers

Introduction

Like any contractor, one of your goals is to increase your revenue. One way to do so is to expand your business into new geographic areas. The purpose of this Briefing Paper is to familiarize contractors with some of the legal issues they may encounter when working in venues outside their home state. The following hypothetical helps to illustrate the traps a contractor may face.

The Story of Leapin’ Lizards Lizard Leather

You have launched an aggressive expansion program, bidding on projects in several faraway locales outside of your home State of Minnesota. Soon, your persistence pays off; your company signs a contract to build a 40,000 square foot office building for the Leapin’ Lizards Lizard Leather, Inc. (also known as “Four-L”) in Phoenix, Arizona.
Four-L’s business is booming and it needs its new building in nine months. “No problem,” you say. Your company prides itself on delivering a quality product on time and on budget. You have your subcontractors all lined up and you mobilize your crews immediately. The job goes smoothly and the building looks beautiful. Better yet, you have been able to make frequent trips to Arizona to oversee the project, getting a welcome break from the Minnesota winter.

Toward the end of the project, your progress payment checks start arriving a little late, but that doesn’t concern you. After all, Four-L is an established company and, from what you hear, is considered to be the “Microsoft of the American lizard leather industry.” Imagine your surprise when, as your company is just completing the project and you are about to provide an invoice for the considerable retainage being held, you read in the local paper that Four-L is on the verge of collapse and will be laying off almost all of its employees, the same employees who were supposed to occupy your beautiful new office building.

You place a quick call to Four-L’s president and ask him what happened. He seems surprised that you are not up to speed on the latest developments in the lizard leather industry. “Haven’t you heard,” he asks, “about the amazing new synthetic product developed in Uzbekistan? Uzbek synthetic lizard leather has the look and feel of real lizard leather at a third of the price. The American lizard leather industry is doomed.” More concerned with your company’s cash flow than Four-L’s, or the lizard leather market in general, you ask, “What about my retainage?” At this point, the president tells you his cell phone is cutting out and he is losing the connection.

You immediately fear the worst and contact your favorite Fabyanske attorney, who is familiar with Arizona law, about filing a lien against the new building. Your attorney is more than happy to oblige and asks you for a copy of the contract, a calculation of the total amount your company is owed, and a copy of the preliminary lien notice you served on Four-L. You can produce the first two items, but you are uncertain about the preliminary notice. Your attorney explains to you that in Arizona, all contractors (even contractors on large commercial projects) are required to provide the owner with a “20-day” notice within 20 days of starting work on a project. [1] This preliminary notice informs the owner that the contractor has the right to file liens against the project. You also learn that if you failed to send this notice, you may have lost or severely diminished your mechanic’s lien rights.

You are familiar with the concept of preliminary notices. You know that they are required for residential and very small commercial projects in Minnesota, but you have certainly never prepared one for a commercial project like this one. Now you face the prospect of trying to squeeze money out of an insolvent lizard leather dealer, without the benefit of mechanic’s lien rights.

Unfortunately, many contractors face the problem encountered in our hypothetical. They contract to perform work in states other than the state or states in which they normally do business. They devote a considerable amount of time to preparing to perform the work; they line up subcontractors and material suppliers and take care of all the logistics necessary to start the project. In the process, they sometimes forget that there may be other things they need to do in order to preserve their legal rights.

Traps for the Unwary

This article cannot possibly inform you of all the different laws to be aware of in all the different states where your company may work. Instead, it will give you some examples of the types of issues you may encounter, as a way of illustrating the importance of addressing these issues before you start a project.

Licensing Requirements. All contractors know that in order to work in another state, they must generally become licensed to work in that state or work through another licensed contractor. Some states, however, have other licensing requirements. In New Mexico, for example, a contractor who does business without a proper license cannot file a lien for its work. [2] The problem for the unlicensed contractor does not end there, though. A New Mexico court recently ordered an unlicensed contractor to return all fees paid by the owner, even though the owner knew the contractor was unlicensed. [3] The message: Make sure you are properly licensed!

Preliminary Notice and Other Lien Requirements. Several states have preliminary notice requirements like the Arizona requirement discussed in our hypothetical. These notice requirements often apply to all construction projects, not just residential projects. The state statutes generally require the notice to be given within 20 days after starting work. Sometimes the statutes will allow a contractor to provide the notice at any time during the project, but then only allow the contractor to file a lien for work performed during the 20 days prior to the date of the notice and any work performed after the notice. Sometimes the requirements apply only to subcontractors and suppliers, while other times they apply to anyone who contributes to the project, including general contractors. Although preliminary notices are simple to prepare, the cost for failing to provide them can be high.

In addition to preliminary notice requirements, contractors should be aware of other lien filing requirements that are unique to the states in which they work. Texas is known for its complex lien law and provides some excellent examples for purposes of this Briefing Paper. Texas requires subcontractors to give the owner notice of amounts due from the general contractor each month as the amounts come due. [4] This notice must be provided no later than the 15th day of the third month following each month in which work was performed. [5] Failure to provide this notice can lead to the loss of lien rights. Texas also has unusual time requirements for the filing of lien statements. Claimants must file lien statements by the “15th day of the fourth calendar month after the day on which the indebtedness accrued.” [6]

Re-reading the last paragraph will convince you of the need to determine a foreign state’s peculiar lien filing requirements. Deadlines for filing lien statements vary greatly from state to state and should be checked as soon as payments begin coming late.

Bond Requirements. Perhaps your project is for a public owner rather than a private owner. As you probably know, most states do not allow for liens against public projects. Instead, state law generally requires the general contractor who works for a public owner to provide a payment bond in order to protect subcontractors’ and suppliers’ interests. What you may not know is that some states require payment bond claimants to provide notice to the owner and general contractor within 20 days of starting work in order to preserve the right to make a claim against a payment bond on a public project. Both California and Arizona have preliminary notice requirements for public works payment bonds. [7]

Most contractors associate payment bonds with public projects. General contractors on private projects only provide payment bonds when the owner requires them. Utah state law, however, mandates that general contractors provide payment bonds for all private construction projects valued at greater than $2,000. [8] Any contractor doing business in Utah should be aware of this requirement and this example illustrates the need to research bond requirements in states outside of your normal geographic reach.

Delaware has a unique bond requirement that only applies to non-resident contractors. Apparently distrustful of out-of-state contractors, Delaware requires them to file a bond with the State in the amount of six percent of the contract price in order to guarantee that the contractor pays all applicable state taxes, license fees and unemployment contributions. [9] The contractor must file the bond before starting any work on the project, and the failure to do so subjects the out-of-state contractor to civil penalties of up to $10,000 and criminal penalties of up to six months in jail. [10]

Notice of Claim Requirements. Not every project goes smoothly. Contractors will sometimes have to make a claim for an increase in the contract price due to delays, extra work, or differing site conditions. Most contractors are generally familiar with the contract clauses requiring them to give notice to the owner within a certain amount of time of discovering the condition that forms the basis for the claim. Contractors might not know, however, that certain states have additional claim notice requirements that apply even if they are not stated in the contract. For example, in order to assert a claim against any governmental body in Wisconsin, a contractor (or any other claimant) must give the governmental body written notice of the circumstances of the claim within 120 days after the events giving rise to the claim. [11] Although there are exceptions to this requirement, failure to give proper notice could bar a contractor’s claim for damages on a public project.

Conclusion

What should you take from this discussion? Should you stick with what you know and pass up opportunities in other states? Maybe, maybe not, but there is no reason your company cannot complete successful projects in any state you choose. You simply need to engage in a little extra planning when you are working in unfamiliar territory. Make certain you fully understand all licensing and bonding requirements. A quick phone call to a construction attorney at Fabyanske, Westra & Hart can tell you if there are any procedures you need to follow to preserve your lien rights. Complete these tasks at the beginning of the project, not when you begin to run into problems. If you do run into problems with either payment or claims for extra costs, seek help early on so you can map out a plan of action that takes into account all the unique features of the laws of the state in which you are working. If you keep this advice in mind, there is no reason why projects in other states cannot be just as successful as your jobs closer to home.

This discussion is generalized in nature and should not be considered a substitute for professional advice. © FWH&T