When a client hires a general contractor to build or renovate property, that company is legally responsible for completing all of that work. The contractor may go out and hire different companies or subcontractors to help execute that work, but the prime contractor still remains liable, and the subcontractors are liable to the general contractor, not the client. Subcontractors have what is called "privity of contract" with the general contractor. The general contractor also has privity of contract with the client.
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 his
subcontractors until he himself has been paid by his 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 it
runs against public policy.
2) 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 presence of subcontractors on the work site should not be
a secret. Owners should be aware that subcontractors have been hired to perform
some of the work.
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.
4) 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. 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
6) 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's handled 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 110 percent of the amount of the lien to obtain
8) Insurance policies. If an employee of a subcontractor
is injured and that subcontractor does not have its own workers compensation
policy, that subcontractor will be treated as though it is an employee of the
general contractor and the injured workman will be paid worker's compensation
under the general contractor's policy. Those expenses will be held against the
general contractor on any loss pertaining to its policy.
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 then
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. The subcontractor should show its insurance broker the language
in the policy that it must cover. Sometimes subcontractors think they have purchased
the appropriate coverage, when in reality they have not.
10) Subcontractors rarely spend the time to have properly
drafted contracts - but they should. General contractors should be equally concerned
about subcontractors having appropriate contracts. A telephone call saying,
"Start on Monday" or a brief purchase order is not sufficient to memorialize
the agreement between parties.
C. Jaye Berger is a Manhattan-based attorney specializing in real estate.
co-op, condo, environmental and construction law.