New Changes in Law Require Changes in Contract Forms

By: Joshua R. Lorenz, Esquire jrl@muslaw.com

As has been widely publicized, earlier this year a number of significant changes to Pennsylvania’s Mechanic’s Lien Law went into effect in January 2007. While most of the discussions on this topic have generally addressed how these recent amendments will impact the construction industry as a whole, the steps that each individual contractor, subcontractor, or materials supplier must take within their own businesses in order to keep pace with the new law have gone largely undiscussed. Because of these changes and other developments in the law in recent years, owners, contractors and subcontractors cannot rest comfortably in using pre-2007 forms. Such forms must be reviewed and revised to comply with all new changes and developments and to provide the maximum protection allowable under the new rules. With this in mind, the following will highlight some of the key changes to Pennsylvania’s Mechanic’s Lien Law and offer some suggestions as to how those in the construction industry can undertake efforts to comply with and protect themselves under these new amendments.

Limited Ability to Waive Lien Rights by Agreement

The most significant change is that unless certain conditions have been met, parties to a construction project will not be able to contractually waive in advance their rights to a mechanic’s lien prior to completion of and payment for the work, which historically has been accomplished through the use of “No Lien” agreements or equivalent provisions in general contracts or subcontracts. With respect to non-residential buildings, while contractors can never waive their lien rights in advance, subcontractors will be able to only if a contractor posts a labor and materials bond guaranteeing them payment. As to residential construction, if the total prime contract price between the owner and the contractor is less than One Million Dollars ($1,000,000), either a contractor or subcontractor can waive its lien rights in advance. For residential construction where the total prime contract price between the owner and the contractor is One Million Dollars ($1,000,000) or more, contractors cannot waive their lien rights in advance, but subcontractors are permitted to do so if a contractor posts a labor and materials bond guaranteeing payment for the subcontractors. Consistent with prior practice, a contractor or subcontractor can always waive its lien rights in consideration for payment for the work, services, materials and/or equipment provided to the extent that payment for such is actually received. However, except for the limited exceptions outlined above, an advanced waiver of a claimant’s lien rights is against public policy, unlawful and void. Thus, general contracts, subcontracts, purchase orders, sales acknowledgements, quotations or proposals and requests for quotations or proposals must all be reviewed and tailored so as to avoid contractual provisions on indemnifications and releases of liens being so overly broad and absolute as to be void and unenforceable.

Inclusion of Additional Subcontractors and Suppliers

A second significant change to Pennsylvania’s Mechanic’s Lien Law is that the amendments expand the categories of parties who are entitled to file a mechanic’s lien. Formerly, only a traditional contractor or first-tier subcontractor had the ability to file a mechanic’s lien. However, under the revised Mechanic’s Lien Law, the definition of “subcontractor,” for lien right purposes, has been expanded so that it includes not only a subcontractor in direct contract with a prime contractor, i.e., a first-tier subcontractor, but also a subcontractor in direct contract with such a subcontractor, i.e., a second-tier subcontractor. Thus, anyone who contracts with a subcontractor that has a direct contractual relationship with a contractor can also file a mechanic’s lien. This change opens the way for many second-tier subcontractors and materials suppliers to avail themselves of the rights and protections of the Mechanic’s Lien Law, which they previously did not enjoy.

Other Concerns Raised By Recent Changes

• Contracts between owners and general contractors usually carry an indemnification against liens. Such provisions used to be of little concern because of the frequent use of “No Lien” agreements. However, going forward, the general contractor’s indemnification of the owner against liens now takes on greater significance and will probably require the general contractor, if he does not already do so, to incorporate similar indemnification language into his subcontract agreements. This language should be properly tailored to account for the recent changes to Pennsylvania law.
• General contractors also should look to obtain interim partial releases of liens and final releases of liens from not only its first-tier subcontractors, but also second-tier subcontractors. This is particularly important on jobs in which advanced waivers of liens cannot be or have not been issued. While interim partial releases of liens in particular have not been used frequently in the past, the new amendments to Pennsylvania’s Mechanic’s Lien Law will likely change this practice.
• In many ways under the new law, first-tier subcontractors share the anxieties of general contractors in dealing with their own subcontractors and materials suppliers. Accordingly, first-tier subcontractors should seek to put in place contractual provisions in their subcontracts and purchase orders to protect their interests and obtain interim partial releases of liens and final releases of liens from the second-tier subcontractors that they hire on a project.
• As noted above, second-tier subcontractors can no longer be ignored. Efforts should be made to ensure that they are accounted for in contracts, subcontracts and purchase orders, and in bonding and lien waiver practices.
• Additionally, the interplay between the amendments to Pennsylvania’s Mechanic’s Lien Law and the Pennsylvania Contractor and Subcontractor Payment Act and/or the Commonwealth Procurement Code is unresolved. Therefore, steps should be taken to address these uncertainties.

Most contracts, subcontracts, purchase orders and related documentation should be reviewed on a case-by-case, document-by-document basis to ensure proper compliance and updating in view of the changes to Pennsylvania’s Mechanic’s Lien Law.

If you have any questions about these important developments and/or how these changes in Pennsylvania’s Mechanic’s Lien Law may impact your business, please contact Josh Lorenz at 412-456-2836, or e-mail him at jrl@muslaw.com.