How Fair Are The Mechanic Lien Laws?
During these years I have become well-versed with the mechanic lien laws. I have filled out the forms, recorded the liens and taken part in more than enough depositions, arbitrations and courtroom actions for one career. Through all of this I have come to the conclusion that the legal avenues provided by the lien laws to subcontractors -- particularly small and new subcontracting companies -- are of little value.
There are three principles that form the basis of our legal system:
- Innocent until proven guilty.
- Conviction before punishment.
- Punishment in proportion to the crime.
Under the lien laws, you're guilty until proven innocent, punished before being convicted and the idea of proportionality is as abstract as particle physics. How else can you describe the practice of owners and builders holding back draws and retentions far out of proportion to the labor and materials required for any remedy they desire?
I am willing to bet that 90 percent of the subcontractors who I deal with have had this experience. It's because this practice is so effective and so devastating to small and new businesses that they are often "blackmailed" into repairs that are not their responsibility.
Holding back money is punishment for a crime that a single individual, with a heavily vested interest in their own finances, says you've committed without the benefit of evidence, juries or trials!
When payment is denied, subcontractors attempting to use the mechanic lien laws find the courts are excruciatingly slow and extraordinarily expensive. Time, cash flow and attorney fees, more often than not, combine into a quagmire that becomes a forum for one-sided compromise instead of justice.
When an owner or builder can arbitrarily hold back money, not in proportion to the required remedy -- and use that money as they see fit -- that owner or builder has no motivation to make any settlement that may be fair or equitable.
It is interesting to note that as a supplier in this process, our money is usually easy to get through the lien laws (if we've done the paperwork correctly). The owners and builders that play this game know we have the financial resources and staying power to go through the system, so it becomes easier just to pay and get rid of us.
Watching these events unfold time after time leads me to the conclusion that only legislative changes can bring common sense and fairness to our industry. Certainly money is at the core of most disputes in business and legislatures can't be expected to deal with all of them. There is precedence, however, for legislative action when flagrantly detrimental practices become widespread in a particular segment of the marketplace.
There is no doubt in my mind that back charges have become endemic and flagrantly detrimental to our marketplace and something has to done about it. The "fix" for the system is to have states' legislatures address two key issues: The structure of contracts and the control and disposition of disputed funds.
First: Most subcontractors are forced to sign contracts that allow money to be held and used at the owner's or builder's discretion for remedies. Contracts with this language are so widespread that individual subcontractors cannot afford to walk away from every job that requires it, or they may not work. I'm not an attorney, but
I don't think you have to be one to recognize a blatant license to steal. That clause should be illegal.
Second: The law should mandate the time period an owner, builder or other entity has to pay a subcontractor after an invoice has been submitted. If the entity being billed thought the work was inadequate, they could retain the right to hold back funds -- but those funds would have to be deposited in an escrow account so they (owners, builders) could not control or profit from them. There must be a penalty for funds not paid or deposited in escrow per the established timetables. As a result, there would be motivation for all parties to come to a fair and equitable solution -- probably through arbitration, not the courtroom.
There are many strong lobbies that would oppose these changes, but I believe they are justified and possible. It would certainly take a commitment of time, money and the combining of resources among many subcontractor organizations to accomplish these goals. Such an effort may very well result in the most important nontechnological changes our industry has ever experienced.