Most boards of co-ops and condominiums spend a lot of time negotiating the terms  of their contracts with general contractors; however, it is often  subcontractors who do most of the work. Sometimes the Boards are not even aware  of how much work they are doing. Despite this fact, their contracts, if they  even have one, are the least thought out and the terms of their work are often  very unclear. However, the legal issues that can arise from work by  subcontractors can be profound for buildings and general contractors who have  not been well-briefed by knowledgeable legal counsel.  

 When a co-op or condominium building hires a general contractor to renovate  property, that company is legally responsible to the owner for completing all  of that work. The contractor may go out and hire different subcontractors to  help execute that work, but the prime contractor still remains liable for the  entire project and the subcontractors are in turn liable to the general  contractor, not to the client. They have what is called “privity of contract” with the general contractor. The general contractor also has privity of  contract with the client.  

 Know Who’s at the Worksite

 However, a subcontractor who has done work, with the knowledge and consent of  the client, may file a mechanic’s lien, the same way that a general contractor can. The subcontractors presence on the work site is not generally a secret. In fact,  owners should make it their business to be aware of the names and contact  information of the subcontractors have been hired to perform some of the work.  I usually make disclosure of this a provision in the contract between the  general contractor and the building.  

 The general contractor is obligated to pay the subcontractor, even though the  owner has been slow or late in paying him. Many a general contractor has tried  to claim that he is not liable for paying subcontractors until he has been paid  by the client, but that is not a legally correct position. In fact, a clause in  a contract between a general contractor and a subcontractor in which the  general contractor seeks to absolve himself of liability for payment until the  client has paid him, is void as against public policy. There are also  situations in which the general contractor has been paid by the owner, but for  some reason has not paid the subcontractor. The best insurance for an owner  that subcontractors have been paid is insisting on partial waivers of lien  throughout the project and final waivers at the end.  

 The subcontractor can foreclose on that mechanic’s lien, however, he can only recover up to the amount that the general  contractor is owed by the client at the time that the lien was filed. Thus, if  a general contractor was paid in full for an application for payment and for  some reason he did not pay the subcontractors, the subcontractors would not be  able to file a valid mechanic’s lien, but they still could sue the general contractor for breach of contract.  

 The clerks who accept mechanic liens for filing have no way of knowing whether  the general contractor has been paid in full or not. A mechanic’s lien may be accepted for filing, but if the property owner can show that the  general contractor has been paid, that may be a basis for vacating the mechanic’s lien. Again, this is why waivers of lien and partial waivers of lien are so  important.  

 If a general contractor has been paid for a requisition that includes work  provided by subcontractors, he is considered to be holding that money “in trust” for those subcontractors and must pay them. The portion that is for the subcontractors is not his money. If he uses that  money to pay his own men, to pay his own rent or to buy a new car, those “trust funds” can be traced and the general contractor can be liable for violating the trust  fund.  

 Even if the general contractor is a corporation, he can be sued as an individual  and required to give an accounting concerning how the money was spent—where it is, who was paid with it and why the subcontractors did not receive it.  The subcontractors can start a mini-class action lawsuit as the beneficiaries  of that trust fund.  

 It is now easier to bond mechanic’s liens than in the past. It is done by the court clerks, instead of by an  application to a judge, with a hearing to determine the amount of the  undertaking. The general contractor must show assets of at least 110 % of the  amount of the lien to obtain a bond.  

 Don’t Forget About Insurance

 If a subcontractor agrees to obtain general liability insurance naming the  client and the general contractor as additional insureds, he must do so before  any work has started. He cannot do demolition and purchase the policy a week  later. If he does and an accident occurs, it may not be covered under the  policy. The subcontractor may also be subject to a lawsuit for breach of contract for  failing to obtain the coverage required under the contract with the general  contractor. Sometimes subcontractors think they have purchased the appropriate coverage and  they have not.  

 A general contractor can wind up paying workers compensation benefits for a  subcontractor’s injured employee, if the subcontractor does not have workers compensation insurance. If property  damage on a project has been caused by a subcontractor and the subcontractor is  not insured or coverage is denied, there can be enormous repercussions because  it may also not be covered under the general contractor’s policy either.  

 I always advise co-ops and condominiums to be concerned about these issues. General contractors should be equally concerned about having appropriate  contracts with their subcontractors as they are with their own contracts with  the buildings and not to just rely on a telephone call or a purchase order.  Subcontractors should spend the time to have properly drafted contracts and  owners and developers should know who is working on their projects and how to  contact them if they need to.    

 C. Jaye Berger, Esq., is a principal at the Law Offices C. Jaye Berger