The First Step in Protecting Your Rights: The Contract

The first, and often most important, step to collect money owed to a Contractor or a Subcontractor is the creation and signing of a contract. The numerous reasons why parties end up disputing payment for work usually can be grouped into three categories:

1. Dispute arising in the Scope of Work performed.
2. Dissatisfaction with the quality of work
3. Lack of funds to pay amount owed.

A well prepared Contract, which describes all of the rights, duties and obligations of the parties, of the precludes the need to file a Mechanic’s Lien. There are countless disputes that arise simply because of the failure to memorialize, in one place (i.e. the Contract) all of t he relevant rights, duties and obligations of the parties involved with the Work. The purpose of a Contract is to attempt to assemble in one place all of the expectations of the parties (as of their respective rights, duties and obligations) and to form a basis for resolving any disputes. Creating a clear and unambiguous Contract can save you a lot of time and headaches while you are performing the Work, before you have expanded a lot of your time money and materials. Regardless of the scope of the project, be it for Millions, or “only” for a few thousand dollars, if you take one thing from this manual: GET IT WRITING AND GET IT SIGNED before you start work.

YOU DO NOT NEED A WRITTEN CONTRACT UNDER THE MECHANIC’S LIEN ACT TO ESTABLISH A MECHANICS LIEN
(but it makes enforcement of collection right much easier)

Change Orders

In addition, if you deviate from the Contract in any way, make sure you have something signed by the Owner, the Contractor, or their duly authorized agent to authorize the deviation, and to describe the effect of the deviation upon your contractual rights. One of the deviation, litigated issues in Mechanic’s Lien cases are Extras. The Owner will insist that the Extra Work was part of the original Contract, while the Contractor responds that the Extra Work was wholly outside the Scope the Work specified in the Contract and resulted in extra labor and costs. To avoid this dilemma, have a Change Order completed and signed by the Owner (or the Owner’s agent- the Construction Manager, the Architect, or an employee of the Owner authorized to change the Scope of Work) acknowledging the Extra Work and what are the costs associated with the Extra Work, before you perform the Extra Work.

Before you start writing a Contract, there are numerous factors to consider and negotiate. A little extra work at this stage can help you avoid having to go through a Mechanic’s Lien foreclosure suit. For a few hours of work, before you sign a contract, you can save yourself the agony of waiting a minimum of two  years to get paid, plus having to pay attorney’s fees, which may exceed $10.000. Cost of litigation are recoverable only if you win. Attorney’s fees are only recoverable if your Contract allows recovery of fees, except if the owner did not have reasonable basis no to pay you.

Do you have a contract with another Contractor or Subcontractor, who in turn has a Contract with the Owner? If “yes” then you are a Subcontractor and the following sections pertain to you. There can be several levels of Subcontractor’s: second, third and fourth Tier s then you are a Subcontractor and the following sections pertain to you. There can be several levels of Subcontractor’s: second, third and fourth Tier Subcontractor’s . Each level has rights under the Mechanic’s Lien Act.

For Example:

Contractor hires Subcontractor 1 (plumber) , who in turn hires Subcontractor 2 (Excavator), who hires Subcontractor 3 (Material man)

Each level of Sub- Contractor can file a Mechanics Lien claim even though they do not have Contracts with the Owner or even the Contractor.

First: Get copy of each Contract “up the line” ending with the Contract with the Owner.

You need to verify:

1. Authority to perform Work
2. Authority to subcontract Work
3. Limitations on rights of Contractor
4. Payments terms
5. Conditions to collect payment
6. Dispute Resolution
7. Warranties

A Sub- Contractor is defined by the Illinois Mechanic’s Lien Act as every person who performs labor and furnishes material for the Contractor.

A ( Mechanic’s Lien) Claimant Is deemed to have a knowledge of all lenders who have mortgages or liens filed in the record chain of title for the property which is maintained by the all lenders with mortgages or liens in the chain of title.

INVESTIGATE AND NEGOTIATE

Attempt to obtain from the Owner or Contractor a plat of survey, which shows the legal description of the property (if you are a General Contractor, you need this anyway). By doing this, you can save on title costs and you can indentify what is actual real estate where you will be performing your work. This may become especially important where the real estate has multiple pin numbers or addresses. Attempt to find out the sources of funds used to pay for this project (i.e. loans, personal funds, equity, business partners etc.) negotiate with the Owner to have the funds placed in a construction escrow and established a draw schedule based on your time frame for performing the Work. With a construction escrow, at the very least you will know the lack of payment is not due to a lack of funds, and this puts you in a better position to collect.

CLAUSES TO INCLUDE OR MODIFY IN YOUR CONTRACT

The following is non- exhaustive lists of the clauses you should consider including in your contract:

1. Attorney’s fees. As discussed earlier a Mechanic’s Lien foreclosure suit can cost in excess of $10.000 with a fee-shifting clause in the Contract you can shift the burden of attorney’s fees to the losing party. The Mechanic’s Lien Act does not allow a contractor to recover its attorney’s fees unless the contractor can prove the delay in payments was unreasonable and vexatious; this is a very difficult burden to meet. A far better approach is to included a fee shifting provision in the Contract, which courts typically grant under the contract claim. There have been a numerous situations where the lien amount was far less than the attorney’s fees expended in recovering the unpaid balance due to the Contractor. Absence of a fee shifting clause can discourage many contractors from prosecuting their rights.
 
In addition from a collections point an Owner may be more reluctant to take a Mechanic Lien issue to trail or to advance a spurious position if he knows that in addition to the amounts owed, he must pay the Contractor’s attorney’s fees if he loses. 

2. Payment Schedules. Establish a payment schedule and stick with it. Many times a Contractor will be damaged because of the lack of a payment schedules, or failure of the Owner to adhere to the payment schedule, resulting in large amounts of money being left in arrears. Absent a contrary provision in a Contract Mechanic’s Lien Act allows a contractor to: 

a) Walk off a project if you are not getting timely paid; and
b) Collect the fair value of Work performed to date; and
c) Collect your lost profit for the unpaid portion of the Work.

If an Owner has missed payments, and/or payments date it may be time to mitigate your damages by declaring a breach and walking off the project until the account is brought current. Before you walk away from a project make sure you understand the dispute resolution provisions of the Contract. Some contracts provide that if there is a dispute as to payments or the acceptability of the work the Contractor is required to continue performing the Work pending resolution of any such dispute if this provision is in your Contract then (i) does the Owner or the General Contractor have to deposit into escrow the amount of the disputed Work, and (ii) is the Owner required to pay the undisputed amount as a condition of the Work proceeding? Without these two clauses there is no incentive for the Owner to resolve the dispute or to quickly resolve the dispute.

3. Dispute Resolution: A contract may provide for dispute relation through Arbitration or mediation instead of litigation. The Illinois courts have held that no-lien clauses are against public policy  and are therefore void. A Contract cannot limit your rights to filling a lien; however alternative dispute resolution is faster and can cost less that litigation. If the Contract provides for arbitration the Rules of the American Arbitration Association should be modified in order to require the arbitration to perform their function in a manner which is procedurally consistent with a trial.

4. Integration Clauses: Consider using an integration clause into your Contract. Simply stated, there should be a clause stating that the Contract represents the entire understanding of the parties, and that any other representations promises or negotiations are void and will not be enforced. This eliminates the sad scenario where the Owner claims that various matters were promised in conversation, but were not incorporated into the Contract, this opening the door for a reduction in the amounts due. If you intend to have a written document, you should limit it to what is in the “ four corners” of the document.

5. Warranties: Under Illinois law, a Contractor can disclaim warranties including merchantability or fitness for a particular purpose. Furthermore a Contractor can limit the amount of time that an Owner has to complain about alleged defects in the work. Absent a provision limiting the time during which the Owner may make a claim for allegedly defective deficient or non-conforming Work on real estate, Illinois statues allow an Owner up to ten (10) years to make any such claims. If you do not intend to warrant your work included a written disclaimer or a “limited” warranty (builders do it all the time). If you are a Sub- Contractor you could be required to incorporated the original contract (between the owner and the general contractor) into your Sub- Contractor, so a sub-contractor must also review the warranty provisions of the contract between the Owner and the General Contractor.

If you have to warrant your Work, then limit:

a) The amount of time during which The Owner can claim The Work breached the warranty
b) The damages which may be collected by the Owner for breach of warranty

6. Resolve the Responsibility between the Architect, the Contractor and the Subcontractor. Many contracts are based upon the forms prepared by the American Institute of Architects (“AIA”). These forms were designed to protect the Architect and not necessarily the Owner, or any Contractor. While these forms are good starting point they usually need to be modified to protect the interests of the Contractor as well as for particular projects. Whether or not the AIA forms are used there should be a provision which states that an Architect who approves the Work relieves the Contractor from liability for all deficiencies in the Work which has been approved except for latent defects.

WHAT SHOULD CONTRACTORS DO?

Do you have a contract with the Owner or Agent acting upon his/her/its behalf to “improve” real estate? If “yes” then you are a Contractor and the following sections pertain to you.

When dealing  with an Agent verify the Contractor’s right of the “Agent” to commit for work to be done at and upon the real estate. “ Agent Includes:

1. Tenant in possession or with a right to future possession;
2. Mortgagee in possession;
3. Receiver; or
4. Any other person or entity who or which has a right to occupy manage or control the real estate or a designated part of real estate.

NOTE#1: LENDERS

A claimant is deemed to have knowledge of all lenders who have mortgages or liens filed in the record chain of title for the property as maintained by the County of Recorder of Deeds. Order a “Track Search” from a Title Insurance Company to determine all lenders with mortgages or liens in the chain of title.

NOTE#2: NO LIEN CLAUSES / AGENTS

If the contract between the Owner and the Agent specifically precludes the filing of a lien by a Contractor [ public works project or Federally funded project] or requires the approval of the Owner for any Work to be done [ as may be common  in Leases or Management Contracts], then get the approval of the Owner before starting work. Under Illinois law courts have held that no- lien clauses are against public policy and are therefore void. An exception to this is in the case of Federally funded projects or public works projects which can limit your lien rights. In addition courts have held that if an agent does not have actual authority to enter into a contract on behalf of an owner then the contract and the lien can be voided.

The bottom line for a Contractor/Subcontractor is to know whom you are contracting with. The easiest way to accomplish this is to have a written contract with the parties identifying who they are and what role they play. If you have agent make that they have authority to enter into this contract by receiving a copy of the agency agreement or a written direction from the principal allowing the agent sign the contract or accept the work.

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