A general contractor on a construction project has direct contact with the project manager, owner, or developer running the project. The connection, “privity” of contract, results in smoother communication and a higher likelihood of payment to the general contractor. The general contractor is typically the first to know of missing or late payment. This can create challenges when it comes to subcontractor debt collection.
For subcontractors, it is often harder to learn about issues regarding nonpayment. This information is often not communicated to subcontractors, subcontractors of subcontractors, suppliers, and material men on the job. The further down the chain a subcontractor is the less access the subcontractor has.
A very clear example of a subcontractor debt collection issue is best illustrated in a recent FFGN case.
We were retained by a supplier to a subcontractor who sued a client for non-payment and exhausted collection efforts. Our client was one of many people who had filed liens on the client’s property after not being paid. The general contractor had also not been paid and filed two large liens on the property as well. Those liens were later bonded.
The general contractor sued the project owner and the surety for the non-payment of $4.1 million, 71% of the project completed, which was acknowledged by the project owner in a separate lawsuit filed against the project owner.
The general contractor sued for breach of contract, non-payment, and to foreclose on their liens against the surety bond posted to bond off the mechanics’ liens previously filed.
The owner, in defense of the action to collect based on the contract and against the bond, claimed that the general contractor submitted invoices for work not performed by the general contractor and the subcontractors and exaggerated mechanics’ liens. Further defenses included negligence or improper conduct of third parties, including, but not limited to, the various subcontractors that the general contractor hired to perform the construction work and failure to mitigate damage. The litigation related to the general contractor claimed they overcharged for the work of their subcontractors and purposefully submitted inflated, unnecessary, or overcharged invoices.
Our client and the other subcontractors were brought into the action because they had filed mechanics liens on the property and were named defendants in the case as lienholders. To protect their status and recover any monies against the mechanic’s lien, they were required to appear in the case and retain counsel to represent them since a corporation can not self-represent.
Our client was able to settle their claim. They agreed to settle for a lesser amount, however, the insurer of the job stated that the settlement was contingent on a settlement also being reached with the subcontractor that hired our client. Ultimately, the settlement was finalized, months after our client and the insurance company came to terms. Therefore, an obvious caveat to filing a mechanics’ lien on a job as a subcontractor in a disputed job with multiple contractors is that there may be a long delay before payment is finally received.
Contact Frank, Frank, Goldstein and Nager if you have a debt collection matter you need assistance with. We have the experience that pays.
