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BEYOND MECHANIC’S LIENS: Collection Strategies to Consider When Mechanic’s Liens Won’t Work.

by Jeffrey M. Bellamy, Esq.

The construction job is complete.  Your invoice has been submitted to the customer.  However, several weeks have passed since you submitted the invoice and you have not been paid.  On your last day at the job site, the architect (or foreman, general contractor, building manager, homeowner, etc.) told you that he was delighted with your work, asked you for business cards to submit to colleagues and friends, and promised that you would be paid “but it might take a few extra days.” When you were out with your spouse during the weekend, you were sure you saw your customer at the ballgame (or grocery, trade show, department store, movies, etc.) but he put his head down and walked the opposite direction.  That is when you realized that you have a problem – you are not going to get paid.  Of course, your fears are confirmed when your phone calls or emails to the customer go unreturned or are returned at times when you are sure not to be in the office.

Mechanic’s liens can be an effective way to lower your risk when it comes to bill collection.  However, Mechanic’s Liens are not foolproof. Indiana’s Mechanic’s Lien laws are technical.  If you make a mistake with the lien requirements, that lien could be invalid.  Also, you may have been talked out of filing your lien by a general contractor – “I’m not getting paid either, buddy.  Don’t make waves because we’re all in this together.  The next draw is due any day now.”  Depending on the project, you only have a limited time to file your mechanic’s lien.  When that time expires, so do your lien rights.  Also, ‘no-lien’ contracts are common. By agreement, your mechanic’s lien rights are waived; or more likely, the ‘no-lien’ status of the work was offered as a ‘take it or leave it’ option as part of the request-for-bid stage.   Regardless, you still have an unpaid invoice and possibly laborers and material providers that want to be paid.  A mechanic’s lien is certainly not the only mechanism to getting an invoice paid or to lowering your collection risks.  Failing to timely file a mechanic’s lien, being party to a no-lien contract, or filing a flawed lien that is found to be unenforceable is not the end – you have other options.

The place to begin with collection problems is at the very start of the relationship by making sure you are using a good written contract. A good written contract, when used appropriately, can head off problems with your customer before they begin.  Ambiguity between the parties’ understanding of the contracted work, especially when working with homeowners, is a major source of dissatisfaction with a finished job and a customer’s reluctance to pay an invoice.  With homeowners, the contract negotiation stage will be your first chance to begin the process of educating them about construction standards and practices that you may take for granted as understood when working for a general contractor or colleague in the trades.  Use this chance to begin setting fair and reasonable expectations.  Material samples and photos of previous work done help in this regard.  By defining clearly the terms agreed upon, including a detailed scope of work, estimated time of completion, change order procedures, job finish specifications, type, brand and quantities of materials to be used and payment terms, your reluctant customer will less likely be disappointed with the end product.  Make sure to give your customer a few days to review the contract before you begin work.  Courts are less likely to enforce a contract in your favor if it was signed without first giving your customer the chance to read carefully the document and possibly get third-party review.  While not a collection issue, have a qualified attorney review your contracts to make sure they comply with the Indiana Home Improvement Contract and Warranty Statutes.

During negotiation of the contract, you may lower your collection risk by requiring the customer to pay a deposit, pay draws, or pay material suppliers directly. Using one or a combination of all these options will not protect you completely if a customer defaults, but it will cushion your fall if a customer refuses to pay.  Paying a deposit at the start of the job provides funds so you do not have to pay out of your own pocket to start the project.  Should the job be several weeks in length, requiring periodic payment of draws further reduces your risk and shortens the time between job completion and your final invoice.  While a deposit and periodic draw arrangement would be ideal, some jobs can be completed before a draw would be due.  In those cases, consider proposing payment of a deposit and direct payments by the customer to material suppliers.  If you do not know your customer well, he may be reluctant to make a significant prepayment to you.  Therefore, payment to the third party material supplier may overcome the customer’s anxiety and limit your risk.  This would leave you only with labor and profit as outstanding debts.  Not an ideal situation, but certainly better than the alternative of having materials outstanding, too.

Keep this in mind when negotiating – proposing deposits, draws, or direct material payments can act as a test; you are hiring your potential customers just as much as they are hiring you.  If a customer balks at all of these payment proposals, insists you start the job as soon as possible, refuses to make any payment until the job is complete and shows little if any interest in the details of the contract, be concerned, be very concerned. This is a customer you may want to think twice about working with.

On insurance restoration jobs, an additional term you can negotiate into your contract is an assignment of insurance proceeds directly to you or joint payment drafts to you and the customer. Insurance claim settlement amounts often will be calculated based on your and your competitors’ quotes after being reviewed by an adjustor or in conjunction with an inspection by an adjustor.  To accomplish this, you will, of course, need an agreement with your customer.  You may make this type of payment arrangement a requirement of your providing a quote to do the work.  Make sure that the assignment or joint payment agreement is in writing.  An attorney can prepare a simple assignment of insurance proceeds or joint payments agreement for you to use as an attachment to your written contract.

Keep in mind, if you and your customer agree to a direct assignment of insurance proceeds, the insurance company’s payment will be less the customer’s deductible.  Make sure your customer understands that he may have to make an additional payment to cover the deductible.  Consider getting that amount in the form of a deposit directly from the customer before work starts.  If you and your customer agree to the joint payment of drafts, make sure that your customer understands that he cannot negotiate that insurance payment with his bank without your consent.  The same goes for the contractor; the customer’s signature will be needed to negotiate the insurance check with your bank.  While this is a less preferred method than simply having the insurance proceeds directly assigned to you, it creates a type of escrow situation where both parties have to be in agreement before the insurance proceeds can be released.

If you file a lien but it has a technical flaw that makes it unenforceable or if the filing deadline passes before you could file the lien, all is not lost.  You may want to consider litigation for a breach of contract action or “unjust enrichment.” The difference between a breach of contract action and unjust enrichment is very simple:  Breach of contract actions are based on written contracts.  Unjust enrichment claims can be raised when materials or labor were provided to a customer without a written contract and the parties dispute whether or not they had an understanding or agreement. Again, using a good written contract has more benefits than just those mentioned above.  You should look at every contract you sign with the perspective of “what if I had to go to Court to enforce this document.”  If you have a customer who refuses to pay you and your lien period has expired or you entered into a no-lien contract, then you will likely have to walk away from the debt or go to Court to have the contract enforced.

If you made the mistake of doing a project without a written contract and your customer refuses to acknowledge that you had an understanding to do the work, then you also may be able to seek recovery from a Court for unjust enrichment.  The legal theory of unjust enrichment is that it would unfair to allow one party to be benefited by the labor and materials of another at the expense of the party who did the work.   It would be careless to think that unjust enrichment makes using a good written contract unnecessary.  However, for those instances where a contract was not used or, for whatever reason, was not valid, unjust enrichment provides a remedy for when a customer decides not to pay.

Of all these methods reviewed, including mechanic’s liens, the best way to avoid an invoice dispute is to deliver the job on time with a high level of workmanship, keep communication open, and never miss an opportunity to educate your client about your products and services. While unfortunate, there is a very small portion of the population who are professional deadbeats.  It is best to avoid doing business with them.  However, many invoice disputes are related to misunderstandings that could have been avoided.  Reinforce reasonable expectations in your client and refer to the contract if there are questions about your responsibilities.  Make sure to always use written change orders for additional work. If you implement these methods you will reduce invoice disputes, increase your bottom line profits, and raise your reputation in the building community by having more satisfied customers.

Practical Advice, Personal Attention

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