Earlier this week, we wrote about the new Retainage Law in Louisiana. It’s a remarkable change in the status quo from the perspective of general contractors, taking all retainage out the hands of the property owner and placing it into an interest earning escrow account.

However, whether the law is productive for your construction company will depend on whether you take advantage of the law.

This week, I published a Legal Guide on Avvo.com offering step-by-step instructions to general contractors on how to take advantage of the the new retainage requirements in Louisiana. Read the step-by-step guide here. And, for a teaser, here is the introduction:

Effective August 15, 2010, retainage withheld by property owners on qualifying projects must be placed in an interest bearing escrow account. This Legal Guide explain how to take advantage of this new requirement to help secure your payment.

As pointed out last month by our friends at the Louisiana Construction Law Blog (Blogspot), Louisiana just passed new retainage rules that became law on August 15, 2010. The act (SB 218) amends the Private Works Act to add §9:4815, requiring property owners to place “retainage” in escrow accounts.

It’s a remarkable change of the status quo in Louisiana, and from my perspective, good news for general contractors (and really anyone else furnishing labor and/or materials).

What The New Rule Requires

So, what exactly changes with this new rule?

We’re all familiar with the concept of retainage: money withheld from a prime contractor by the property owner until the completion of work. Before this law, property owners were responsible for holding the money and disbursing it when contractually required. As every contractor knows, this leads to the owner dragging its feet in releasing the retainage and motivates the owner to figure out ways to hold onto the cash.

The new law changes these circumstances significantly, by requiring the property owner to deposit the retainage amounts withheld into an interest bearing escrow account, and into the control of an independent escrowing agent.

Earned interest accrues in favor of the contractor, and the money is released by the escrowing agent pursuant to requirements of the statute. If there’s a dispute between the owner and general contractor, the money is preserved as security pending the outcome of litigation.

When The New Rule Applies (and Doesn’t Apply)

The retainage requirement applies to all projects over $50,000.00 that are not: (i) a single or double family residence; or (ii) classified under a list of specific industries (see list of industries in quote of legislation below).

This means the retainage law will apply to nearly all commercial projects, and all multi-unit (3+) residential construction. The law applies to private projects only, and not State or Federal projects (which are governed by separate laws).

Who is Protected?

Well, the law itself only positively affects the property owner and the prime contractor. Largely, therefore, the law is designed to protect general contractors by ensuring the retainage money is available when due. Just as the construction lien will act as security, so too will the escrowed retainage.

But, does this protect the subcontractors and suppliers on a project? The short answer is “no.” The long answer is closer to a “yes.”

While the retainage money is not held in escrow for the direct benefit of the subcontractor, the general contractor has a duty to pay subcontractor and supplier accounts once the money is made available (and there are misappropriation laws to this effect). There’s an additional practical benefit. Since many sub and general disputes are rooted in a dispute with the property owner, this new law may reduce the owner/GC disputes, and thus reduce the GC/sub disputes.

Interesting Questions

Finally, I’ll leave you with some interesting questions that may arise in the coming years about this new retainage law:

(1) What is the enforcement mechanism? As written, the law requires escrowing of retainage funds, but there is no penalty if a property owner doesn’t do it. In all likelihood, this means the general contractor will be required to insist on compliance. When competing with other general contractors for business, it may be tough to make this a staunch requirement.

(2) Will Subcontracts Intervene to Claim the Money? Subs/Suppliers do not directly benefit from the new retainage rules. However, if the subs / suppliers know that money is there, and they have a claim on it, can they intervene in any dispute between the owner and prime contractor to make a claim on the money? Can they get an attachment or sequestration on the funds pending the dispute between them and the general contractor?

(3) Interest Accrues to the Subcontractor? And perhaps the most interesting question concerns the interest on retainage. Previously, the property owner benefited from the retention of funds. Now, the general contractor benefits from fund retention. Are subcontractors or suppliers entitled to their proportionate share in the accrued interest?

The Law Text

Here is the new law’s text, in full. Enjoy.

§4815. Escrow of funds due under contract; procedures

A. When, under the provisions of this Part, a contract in the amount of fifty thousand dollars or more is entered into between an owner and a contractor and if in accordance with the terms of such contract funds earned by the contractor are withheld as retainage by the owner from periodic payments due to the contractor then such funds shall be deposited by the owner into an interest bearing escrow account. The provisions of this Section shall not apply to a contract for a single family residence or double family residence. The provisions of this Section also shall not apply to a contract for the construction or improvement of the following types of industrial facilities that are, or will be, engaged in activities defined or classified under one or more of the following subsectors, industry groups, or industries of the 1997 North American Industry Classifications System (NAICS):

(1) 22111 electric power generation; (2) 321 wood products manufacturing; (3) 322 paper manufacturing;(4) 324 petroleum and coal products manufacturing; (5) 325 chemical manufacturing; (6) 326 plastics and rubber products manufacturing; (7) 331 primary metals manufacturing; (8) 562211/562212 hazardous and solid waste landfills; (9) 422710 bulk stations and materials; (10) 486110 crude oil pipelines; (11) 486910 refined petroleum products pipelines; (12) 486210 natural gas pipelines; (13) 486990 other pipelines; (14) 211112 natural gas processing plants.

B. An escrow account under the provisions of this Section shall be located at a qualified financial institution and shall be under the control of an escrow agent. The escrow account and escrow agent shall be selected by mutual agreement between the owner and the contractor.

C. Upon completion of the work that is the subject of the contract, the funds, including any interest located in the escrow account shall be released from escrow under the following conditions:

(1) If there are no existing claims by the owner, the whole amount shall be paid to the contractor within three business days upon receipt by the escrow agent of a written release signed by the contractor and the owner.

(2) If there is a dispute between the owner and contractor and the contract does not provide for binding arbitration of such dispute:

(a) Undisputed amounts shall be released by the escrow agent within three business days of receipt of a notarized request of the contractor.

(b) Disputed amounts that are the subject of a judicial proceeding shall be released by the escrow agent within three business days of the receipt of a final order by the court. Upon receipt of the order of the court, the escrow agent shall pay the contractor or owner such amounts as are determined by the court.

(3) If there is a dispute between the owner and contractor and the contract provides for binding arbitration of such dispute, the following shall occur:

(a) Undisputed amounts shall be released by the escrow agent within three business days of receipt of a notarized request of the contractor.

(b) Disputed amounts that are the subject of binding arbitration under the contract shall be released by the escrow agent within three business days of the receipt of a final order by the arbitrator who has been selected by mutual agreement between the owner and the contractor. Upon receipt of the order of the arbitrator, the escrow agent shall pay the contractor or owner such amounts as are determined by the arbitrator under the rules as defined in the contract between the owner and the contractor.

D. Receipt by the escrow agent or the qualified financial institution in which the escrow account is maintained of what purports to be a written release signed by the contractor and owner, or an order by a court or arbitrator, shall be a full release and discharge of the escrow agent for transfer of funds to the contractor. Neither the escrow agent nor the qualified financial institution in which the escrow account is maintained shall be held liable to any party based on any claim that the written release is unauthorized, forged, or otherwise fraudulent.

E. Neither the escrow agent nor the qualified financial institution in which the escrow account is maintained pursuant to the provisions of this Section shall have any liability to the owner, contractor, or any other person when complying with the provisions of this Section.

This article was originally posted on Wolfe Law Group’s topic-specific Construction Law Monitor.

Over the weekend, I answered a question over on Avvo.com about mechanic liens that gets asked very often, and I thought it was a good idea to share here.

The question is this: What are my legal rights as a contractor if my lien is not filed on time?

The question was asked related to Washington law, but the answer is applicable around the nation. Mechanic liens are an excellent remedy – and I highly recommend preserving and using these rights when needed. However, they are not a contractor’s only remedy.

What other rights does a contractor have? Take a look at my answer here:

Liens are a terrific remedy for contractors. If you’re unpaid and file your lien on time, you acquire security rights against the property itself and are legally able to file suit against parties who you did NOT contract with (i.e. the property owner, if you are a sub).

However, if you don’t file a lien, you still have plenty of legal rights to recover what is owed to you.

Your rights, however, are exclusively against the party who you contract with. You have an action against them for breach of contract. The period to bring this suit is quite a bit longer, between 3-6 years, depending on the type of contract.*

*This is the statute for Washington. Remember that the statute of limitations will be different depending on your state.  In Louisiana, it is 10 years, unless on an open account, in which it is 3 years.

It’s important to contact a great construction attorney to bring a breach of contract suit if you are unpaid, and are too late to proceed with lien rights. Find a construction attorney in your area at Avvo.com.

Hurricane Katrina delayed my bar results, destroyed my house and changed my plans. It’s hard to believe that 5 years have gone by, and it’s been about that long since I’ve looked at these pictures. They were taken in the months after the storm, when I was starting Wolfe Law Group and getting back on track.

A lot of our family, friends and colleagues have had a very difficult half-decade. Hurricane Katrina’s effects are fading, but they aren’t gone. Just from my own personal experience in the legal profession, I can see the storm’s impact lingering as the subject of on-going litigation.

The city is, however, making it along. And I feel quite lucky to have a great staff, great clients and great family and friends, who without which, Wolfe Law Group could not be the success it is today. Thanks to all of you.

Click on any photo in the main window to see description. For great professional photos, see this story from Boston.com.

You’re looking to work on a construction project…but you don’t have a license. Surprisingly, this happens quite often.

Perhaps you’re to the industry, or a company trying to work in a neighboring state to take advantage of an opportunity there. Before you prepare a bid or sign a contract, the first order of business is getting legal. And depending on where you are, that usually means becoming a licensed contractor.

When our office is approached with these types of situations, we’re frequently asked if a “joint venture” with a licensed contractor can resolve any licensing deficiencies with the unlicensed party. The answer to this question depends on where you are, and the circumstances of the project.

In the past, we’ve highlighted Mike Purdy’s Public Contracting Blog (it’s an excellent resource on prevailing wage and public contracting issues – previous posts here). Last week, Mike discussed this interesting and popular question on the contractor licensing requirements for joint ventures.

His post focuses on Washington law. In Washington, RCW 18.27.065 provides as follows:

A partnership or joint venture shall be deemed registered under this chapter if any one of the general partners or venturers whose name appears in the name under which the partnership or venture does business is registered.

The key here, as Mike points out in his well-written blog post, is whether the registered member of the venture is in the JV’s name.

Louisiana’s contractor licensing law treats this situation exactly opposite from Washington. Here is a snippet from the Louisiana State Board of Contractor’s website, on their FAQ page:

I want to do a joint venture with a licensed Louisiana contractor. How does that work?

All parties in a joint venture are required to be licensed at the time the bid is submitted. Each party to the joint venture may only perform within the applicable classifications of the work of which he is properly classified to perform (Section 1103 of the Rules and Regulations of the Board).

So indeed, where you are is critical to the question of whether you can or cannot by-pass contractor licensing or registration requirements by partnering with a registered company.

And this becomes another example of how working on a construction project in one state can be legally much different than working in another state. What are some of the other examples? How state laws treat Pay When Paid Clauses, and the different requirements for Mechanic Liens and Preliminary Notices.

So, you fulfilled all of your notice requirements and you filed your mechanics lien on time. The other party still hasn’t made payment, and you begin to wonder…now what?

Why Mechanics Liens Work

First, before discussing what happens after the lien is filed, let me first address why mechanics liens are effective ways to collect on non-paying projects.

This is an important point when discussing what happens after a mechanics lien is filed because it touches on why mechanics liens sometimes prompt payment without any further action after the filing itself.

Mechanics Liens are effective for the following reasons:

- Without a mechanics lien, you can only sue the party you contracted with. With a lien, you can sue the property owner, those up the contracting chain from you, and the surety bonding the project.

- A mechanics lien can prevent a property from being sold, transferred or refinanced

- Without a mechanics lien, you have no security when you file suit on your breach of contract claim. With a lien, your claim has the property has security.

This is a perfect storm of aggravation to the project and the parties working on the project, that frequently results in getting you paid without any action beyond filing the lien. See how it worked on the MGM Project in Vegas here.

What Happens Next?

But what happens if your mechanics lien does not produce immediate payment? See article on this topic here.

Most states require the lien be “enforced” or “foreclosed.” This typically means that you bring a lawsuit against the person you contracted with and/or the other relevant parties (property owner, prime contractor, surety, etc.). In most circumstances, the lien stays on the books while your action is pending, and if you win…you have the security of the property to ensure you get paid.

It is very important to recognize that you only have so long to enforce or foreclose on your lien. If you fail to do this within the specified time frame…your mechanics lien will expire completely.

The time you have to enforce or foreclose on a mechanics lien varies depending on the state where the project is located. We have Construction Lien Law Summaries, and specifically the time period to enforce mechanics liens from each state, available on our State-By-State Lien Law Summaries and Forms Page.

And don’t forget about Zlien’s Lien Pilot, which calculates your project’s deadlines for you (including your deadline to foreclose / enforce a mechanics lien).

What Happens When My Lien Expires?

Well, this is a pretty sensitive subject. You can always bring your lawsuit against the party in your contract (if you are within the statute of limitations for your state).

But with respect to the mechanic lien’s viability, Kelly Davis has a great article published on her blog on this issue: Didn’t Foreclose on your Mechanics Lien? What Should You Do Now?

This article was originally posted on Express Lien’s topic-specific Construction Lien Blog.

Mechanic lien laws are highly technical, and they frequently change in unpredictable ways (see recent controversial example from Washington). We’ve expressed the sentiment a hundred times on this mechanics lien blog – it’s very easy to make a common lien mistake.

Unfortunately for JE Dunn Construction Co., it seems someone may have really dropped the ball filing its $12.4 Million mechanics lien. The developer of a stalled West Edge project in Kansas City now claims the construction company’s mega-lien has a mistake that invalidates it.

When it comes to filing a mechanics lien, sometimes you only get one chance to get it right. Depending on the merit of the developer’s claim, JE Dunn Construction Co. may have gotten a very frustrating and expensive lesson about the technical nature of mechanics liens.

From the press, it looks like the lien would have converted the debt from an unsecured claim into a secured claim in the bankruptcy proceedings pending on the West Edge project. Without the lien, the claim falls to an unsecured one, making collection a lot less likely. That makes this lien mistake one of the country’s most expensive.

What Could Have Went Wrong?

What could have went wrong with the mechanics lien, you ask? What kind of mistake could invalidate such a big claim?

Funny enough, the biggest claims in the world can be invalidated by just the simplest and most technical oversight. Here are examples of common filing errors that could have cost JE Dunn Construction Co. its secured claim:

• Poorly Identifying the Property: Most states require the use of a legal property description, and others require specific descriptions of the property. In every state, the requirement is technical, and a lien can be invalidated because of an inadequate description. (See article about describing properties on mechanic liens).
• Signing Mistakes: Mechanic liens must be signed in a particular way. Some states require they be notarized, some states require a verification with specific and statutory language. The smallest waiver from these requirements can result in the mechanics lien being invalidated. (See article on Washington lien invalidated because of verification error)
• Not Sending Notice: Some states require notice when you begin work. Some states require notice immediately before filing a mechanics lien. Some states require notice immediately after filing a lien. Failing to deliver this notice, can forfeit your mechanic lien rights. (See blog posts about preliminary and other notices)

Who is Filing Your Mechanics Lien?

Let us be the first to tell you that if you are about to file a $12.4 Million mechanics lien, you have no business filing it without the counsel of a qualified and experienced construction attorney. That is big money, and it’s certainly worth spending a few thousand dollars on counseling.

However, there are occasions when it doesn’t make financial or practical sense to hire an attorney to file a mechanic’s lien. That’s when we really shine. And some law firms - like this one in Georgia – have even recommended using a lien service to file a construction lien in the right circumstances.

For this, check out zlien, a lien filing service that was founded by Scott Wolfe Jr., principal attorney for Wolfe Law Group.

This article was originally posted on zliens topic-specific Construction Lien Blog.

I spent a great deal of time over the past five years working hard to provide the Louisiana building industry with a comprehensive construction law resource. The by-products of that work is this blog, along with our topic and location specific blogs: Louisiana Construction Law Blog, the Louisiana Green Building Law Blog, and the Chinese Drywall Blog.

But, of course, I’m not the only game in town. And I couldn’t possibly be. There are tons of other great blogs and resources out there for folks to stay abreast on construction law issues. In fact, I subscribe to all of these blogs and resources and get a lot of information from them.

Here are some of my favorites:

- Louisiana Law Blog. Not updated often, but whenever something is posted, it’s something worth reading. Published by the KeanMiller firm, the only downside here is that the posts aren’t always about construction law issues. It’s more of a general blog that touches on construction law issues.

- Louisiana Construction Law Blog on Blogspot. Aside form our firm, this is the only other firm that blogs exclusively about Louisiana Construction Law. Their blog, while new, is also very resourceful, and they are doing a great job of blogging about issues that affect Louisiana contractors.

- Mike Purdy Public Contracting Blog. Not a blog specifically about Louisiana issues, but there is plenty here that can help a Louisiana contractor who does public construction work.

- Shields Mott Lund Newsletters. While not a blog, and a bit reminiscent of how newsletter content was disseminated by law firms in the 1980s, there’s no denying that once you find this information, it is good.

- Louisiana State Board of Contractors Announcements. Not only is the board’s website a good place to find information on the state’s licensing requirements, but they also have an “announcements” page, where they sometimes alert folks to changes in the law that affect the construction industry.

Each year, the American Bar Association’s Forum on the Construction Industry conducts an annual meeting, and the Construction Law Update is distributed to its members. The document is a compilation of cases and legislation from the past year affecting the construction industry, broken down state-by-state.

Matt DeVries of the Best Practices Construction Law Blog is one of the editors for the document, and he posted about the release of the 2009 Construction Law Update on his blog here. If you’d like to get your paws on a copy of the publication, you can email him.

A big thanks to Matt for contacting me to contribute the Louisiana update for the publication.

What’s new in Louisiana? Check out the PDF of the Louisiana portion of the Construction Law Update here.

Mike Purdy’s Public Contracting Blog is so awesome, he got to this unique story that touts a legal link between Seattle, WA and New Orleans, LA before I could. Before getting to the article, let me comment that if your company does public contracting work anywhere in the nation, Mike Purdy’s blog is going to consistently feed you very relevant information on the topic. I highly recommend you check it out, and subscribe to his feed.

With that said, what article am I talking about?

Well, if you’re from the New Orleans area you likely remember the spat between former Mayor Ray Nagin and the city council about whether convicted felons are considered “responsible bidders” on city contracts. After the fight, the vote, the veto, and the veto override, an ordinance (Ordinance Calendar No. 27,892) was adopted designed to stop the city from awarding contracts or grants to folks convicted of felonies in the previous 5 years.

Defining “Responsible Bidder”

What is a “responsible bidder?” Nearly every state and city’s public bid laws use the term, allowing government entities to award contracts only to “responsible bidders.” This interesting question of just what makes a bidder “responsible” was squarely in dispute between the New Orleans mayor and city council.

In the mayor’s veto message, he wrote that “under Louisiana law, responsibility [refers to] likely contractor performance, not the conviction history of a contractor’s principals, members and/or officers.”

Council-member Stacey Head lead the fight against the mayor for the council, arguing that responsibility does refer to the qualifications of the bidder him/her/itself, and not simply whether the contractor is likely to perform. In her veto-override press release, she quotes the Louisiana Attorney General and Louisiana Supreme Court on the subject.

The AG states that “responsibility refers to the character or quality of the bidder – whether it is an entity with which you are safe doing business.” Understanding Public Bid Law, Michael J. Vallan, Assistant Attorney General, February 20, 2008.

The Supreme Court allows an municipality to look at “financial ability, skill, integrity, business judgment, experience, reputation…and other similar factors bearing on the bidder’s ability to successfully perform the contract.” Louisiana Associated General Contractors v. Calcasieu Parish School Board, 586 So.2d 1354 (La 1991).

Ordinance Cal. No. 27-892

So, what does this ordinance say? Simplly, it prohibits the city from contracting with certain felons. Here is the precise language:

[Prohibits City from contracting with] any person, corporation, or entity, whose principal(s), member(s), and/or officer(s) have within the preceding five years been convicted of, or pled guilty to, a felony under state or federal statutes for embezzlement, theft of public funds, bribery, falsification or destruction of public records.

The ordinance does not cast a terribly wide net, and so it’s surprising that this caused any controversy at all. The City is not restricted from contracting with any felons, only those who committed a felony that has some sort of public-corruption element.

Responsible Bidder Criteria Important in Washington and Elsewhere

New Orleans is not the only place examining the criteria of a “responsible bidder” in public bid law. As Mike Purdy points out in his post, bidder responsibility is a hot topic in Washington, where a task force was created by the Capital Projects Advisory Review Board (CPARB) to “address concerns by contractors of how public agencies are using responsibility criteria.”

tThe CPARB has released Guidelines on Bidder Responsibility (check them out, and the CPARB page here). The criteria guidelines released by CPARB are much broader than the New Orleans ordinance, requiring consideration of things like delinquent state taxes, on-going lawsuits and the like.

One difference between the “Guidelines” and the “ordinance” is, of course, that the New Orleans ordinance actually prohibits a class of persons from being considered a responsible bidder, while the guidelines only offers suggestions as to what municipalities should consider when selecting a responsible bidder. Will Washington take the next step and mandate the elimination of certain bidders? Mike Purdy points out that they have the power:

Under RCW 39.04.350, a public agency in Washington State could establish Supplemental Bidder Responsibility Criteria similar to the New Orleans measure on not contracting with firms whose owners are convicted felons. The Task Force on Bidder Responsibility will hold its second meeting on May 20, 2010.

This article was originally posted on Wolfe Law Group’s topic-specific Construction Law Monitor.