Whether you are the owner or the general contractor, dealing with mechanic’s liens filed by subcontractors or suppliers can be frustrating and, in some cases, present the very real threat Creative Legislative Solutions To Bond Off Mechanic's Liensof having to pay twice for work or materials. Most, if not all, states’ lien laws provide that prior payment, whether by owner to contractor or contractor to subcontractor, are not a legal defense to a lien filed by a lower tier subcontractor or supplier who has not been paid. While there may be legal penalties for filing improper or exaggerated liens, when a lien is filed, it causes a ripple effect “upstream.” First, it is almost certainly a violation of the owner’s mortgage. The failure to pay that led to the lien is a default under the owner/contractor and contractor/subcontractor agreement. It makes no difference if the lien is legitimate or illegitimate because once filed it is a cloud on title and will delay or preclude refinancing, sale, or the approval by a lender of the owner’s next construction draw (which can then delay payment and cause more filed liens).

Most states have statutes that allow such liens to be “bonded over,” but that means going to a surety company for the bond, which may require full cash collateral. Bonds not only cost money, but also absorb bond capacity that is then no longer available for other projects until the liens are released. If an owner has to bond off a lien, it normally does not have a relationship with a surety company and has to go through a complete financial disclosure process to qualify for a bond. Finally, some states (Texas and Arkansas, for example) mandate that the amount of the lien bond has to be twice the amount of the filed lien. Obviously, such a requirement can cause serious issues particularly where the underlying lien is arguably invalid.

But…what if there is an existing payment bond already in place for the  project, normally provided by the prime contractor (the costs of which were passed through to the owner)? That bond does not prevent the filing of liens, but simply gives the lien claimant another “legal” way to try to get paid.  Most claimants will make a formal claim against the bond but also assert liens. d. One answer: Most states should follow the lead of Tennessee, which allows a copy of an existing payment bond, if it meets certain criteria, to be filed of record in the same place as the filed lien, and the filing of the bond automatically “discharges” the lien of record, just like a separate filed lien bond. No separate lien bond from a surety is needed. While the underlying dispute must still be resolved, at least the cloud on the title to the real property of the project is removed. The owner is happy. The payments continue to be made.  The claimant is normally very happy to now be able to sue on the payment bond. The Tennessee statute is located at T.C.A. 66-11-142(b).

If your state does not have such a statute, consider “lobbying” for a change. The local chapters of the various construction trade associations, such as ABC and AGC, may be willing to provide legislative support.

No. 9 of the Top 10 Horrible, Terrible, No Good Mistakes Lawyers Make in MediationsThis post is a continuation of the 10 most horrible, terrible, no good, “bang your head against the door” mistakes that I have seen lawyers make before, during and after mediations in which I was the mediator. As stated in previous posts, it takes more than throwing together a mediation statement at the last second and showing up at the mediation. Doing it right requires the same kind of due diligence and work that goes into preparing for a key deposition or even trial. Great “mediation” lawyering is essential and is the best way to get to an acceptable deal.

No. 9: Not Having a Pre-mediation Call With the Other Lawyer and the Mediator

So, you have done your research and feel comfortable about the jointly selected mediator. You have an agreed date for mediation. Do you then just send in the confidential mediation statement and show up on the date? No.

Set up a call with the mediator (many good mediators insist) and opposing counsel and talk through the many issues that can derail a mediation. Consider the following, all of which you could address in a pre-mediation counsel conference call with the mediator.

Do you need information or documents from the other side? It can infuriate mediators when, in the middle of a mediation, they hear one side use an excuse that it does not have some information (or a document) necessary to make a decision and the other side does not have immediate access to such documents.

Do you agree to exchange all or some parts of the mediation statement? Discuss with opposing counsel what you plan to do and what you expect from the opposition.

It is also crucial to know who will attend. If the party representatives hate each other or you know that the other representative is not the decision-maker and may be covering himself because he screwed up the deal, a pre-mediation call can be essential. If insurance is involved, will the insurance adjuster (where the money will be coming from) be present? It is a bad way to start off a mediation when the lawyer shows up without the insured (who may not care because he’s not paying for the defense) or without the adjuster (who has 235 other cases) but whom the lawyer promises will be “available by phone” on the West Coast (but then disappears late in the afternoon when that side needs some additional authority to get the deal done).

The lesson is that the more you learn from a pre-mediation call with the mediator and counsel, the more time and attention you can devote to the real factual and legal issues in dispute during the actual mediation.

To be clear, great mediation advocacy is not the most important element in getting a deal done, but it can be a major factor.

Read No. 10 on the list.

To Reserve or Not to Reserve? Maintaining Claims against the GovernmentContractors do not have to waive future claim rights when negotiating the direct cost of a change order (modification) with the government, despite banter by the contracting officer that reservation of claims is not permitted. More often than not, the contracting officer will inform the contractor that it is necessary to incorporate the following language into the modification to settle the change order: “[t]his change order is in full and complete satisfaction of all costs, direct and indirect, associated with the work and time agreed to herein.” This premise is simply false. The applicable FAR clause, FAR 43.204(c)(2), expressly recognizes the contractor’s right to reserve claims in a modification. Thus, reservation of claims is not only permitted, but it is also especially prudent in situations where the impact of a change on the unchanged work is unknown.

So what is the best way to preserve claims? The safest course of action is to negotiate reservation language in the modification itself. The following is an example of language reserving delay and impact claims, incorporated into the modification, which has been upheld as an appropriate reservation of claims:

Contractor reserves any and all claims, including cumulative impact claims, for additional time or money relating to costs (including extended overhead costs) or damages arising from or related to changes, delays, impacts, inefficiencies, disruptions, suspensions, and/or acceleration to the Work. Contractor does not waive any defense, right, or remedy that the Contractor may have under the Contract, by statute, at law, or otherwise.

A recent Armed Services Board of Contract Appeals (ASBCA) decision, however, suggests there are other ways to reserve rights without negotiating language in the modification itself.  In Appeal of NMS Management Inc., ASBCA No. 61519, the board held that a contractor did not waive certain claims as a matter of law where it performed under protest by reserving its rights in an email transmitting the executed modification. Note that NMS is no guarantee that another board judge or the U.S. Court of Federal Claims will agree, but it is now an argument that has been accepted by the board and can be made if necessary. To avoid any risk, insist on including the requisite reservation language in the modification itself, and certainly cite FAR 43.204(c)(2) if and when the contracting officer asserts that reservation of rights is not permitted.