Wednesday, November 17, 2010
Pay if Paid II - Mechanic's lien affect
Some states prohibit mechanic's lien waivers. But not Virginia. By statute, mechanic's lien rights can be waived in Virginia. Construction attorneys have generally (I think I correctly speak for most) presumed that meant a clear and express waiver of lien rights. However, a recent Circuit Court opinion agreed with the theory of bank counsel trying to void various mechanic's liens on a project by arguing that: 1) because subcontractor subcontracts had enforceable pay if paid provisions; and 2) because the owner went bankrupt and was not going to ever be able to pay the prime contractor; that, therefore, the pay if paid clause had the effect of a mechanic's lien waiver, and voided filed mechanic's liens. I respectfully disagree with the court's analysis, and think this a totally wrong result; but this is another example of risk allocation that must be considered by any subcontractor before accepting a pay if paid provision in its subcontract, and another reason for prime contractors to consider adding such provision in their subcontracts, or of owners mandating such provisions to be flowed down in their prime contracts. Whether that decision is appealed remains to be seen, but it is clearly another warning shot over the bow of subcontractor rights.