12.9 Defenses

LibraryDebt Collection for Virginia Lawyers: A Systematic Approach (Virginia CLE) (2018 Ed.)

12.9 DEFENSES

12.901 Owner's Priority. If the owner is compelled to complete the structure undertaken by a general contractor because of the failure or refusal of the general contractor to do so, the amount expended by the owner for the completion has priority over all mechanics' liens that have been or may be placed on the structure. 204 A mere estimate will be sufficient to meet the owner's burden of showing that the cost to complete exceeds the amount due the general contractor. 205 Under section 43-7, if the owner completes the building and shows that the cost of doing so has exhausted the fund, this is a complete defense to the mechanic's lien of a subcontractor, or any person furnishing labor or materials to either of them. However, where the owner does not complete the building and does not offer any evidence as to the cost of completion, he or she cannot use section 43-16 of the Virginia Code to claim a setoff or counterclaim against the funds that he or she is withholding from the general contractor. 206

In order to obtain the protection of section 43-16, a vendee of a real estate sales contract must ensure that its interest in the property is a matter of record. In E.E. Stump Well Drilling, Inc. v. Willis, 207 the court held that the buyer of a home under construction was not entitled to claim a setoff for the cost expended to complete construction because the contract was not recorded and the buyer had no record interest in the property.

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12.902 Limitation on the Amount Claimed by Subcontractors and Sub-Subcontractors. The amount for which a subcontractor may perfect a lien cannot exceed the amount for which the owner is indebted to the general contractor at the time the notice is given or for which the owner may thereafter become indebted to the general contractor through his or her contract with the general contractor. 208 It is an affirmative defense to a suit to enforce the lien of a subcontractor that the owner is not indebted to the general contractor or is indebted to the general contractor for less than the amount of the lien sought to be enforced. 209 The statutory limit on the owner's liability is designed to relieve the owner of the possibility of having to make a double payment under the contract. 210

The amount for which a sub-subcontractor may perfect a lien cannot exceed the amount for which the subcontractor could file a lien under section 43-7 of the Virginia Code. 211 Therefore, under the statute, a sub-subcontractor is not entitled to a lien unless the general contractor is indebted to the subcontractor at the time the notice is served, or thereafter becomes indebted to the subcontractor under the contract. 212

In W.O. Grubb Steel Erection Inc. v. 515 Granby, L.L.C., 213 Turner Construction Company entered into a general contract to construct the Granby Tower project, but work on the project was terminated due to the owner's inability to obtain financing. Paragraph 1.1 of the contract included a provision that the owner would not be indebted to Turner unless financing was secured. Various unpaid subcontractors recorded mechanics' liens against the property and began enforcement proceedings. The owner filed a plea in bar asserting that section 43-7 provides an affirmative defense to a subcontractor's suit to perfect a lien where the owner is not indebted to the general contractor. Turner asserted that the owner had waived its rights to rely on

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paragraph 1.1 of the general contract by issuing a notice to proceed, instructing Turner to continue work, and approving payment applications.

The court held that the owner did not intend to relinquish its rights to the defense provided by paragraph 1.1 of the contract, reasoning that the owner issued the notice to proceed and the directions to continue work in expectation that it would secure financing. In issuing the work directives, the owner never represented that the loan had been funded and, in fact, informed Turner when the loan was denied and attempted to find alternative financing. The court concluded that Turner was not reasonable in relying upon a commitment letter from which the amount of the loan had been redacted and in failing to request further proof of the owner's ability to pay. The court found that the owner terminated the contract due to its failure to obtain financing and not for its convenience; therefore, the contract was properly terminated and paragraph 1.1 barred recovery by Turner from the owner. This in turn precluded recovery by the subcontractors pursuant to section 43-7. Accordingly, the court granted the owner's plea in bar to the subcontractors' enforcement suits and released their mechanics' liens.

In a later proceeding involving the Granby Tower project, 214 the general contractor, again Turner Construction Co., and Suburban Grading & Utilities entered into a subcontractor agreement for work on the project. Suburban was not paid after performing significant work and filed a cross-claim for breach of contract against Turner. Both parties moved for summary judgment. Turner contended that the "pay-if-paid" clause contained in the subcontract prohibited recovery by Suburban because Turner had not been paid by the project owner. Suburban argued that a provision of the general contract between the owner and Turner that was incorporated by reference into the subcontract rendered the pay-if-paid clause ambiguous. The provision authorized Turner to bill the owner for payments made to subcontractors, which Suburban argued indicated that Turner was supposed to pay the subcontractors before billing the owner. The court held that the pay-if-paid clause in the subcontract agreement imposed an enforceable condition upon Suburban to the extent that any provision in the general contract conflicted with it. Furthermore, the subcontract contained a priority clause stating that if any provision of the subcontract conflicted with the general contract, the provision imposing the greater duty or obligation on the subcontractor controlled. The court noted additional provisions in the general contract related to payment obligations that would be rendered meaningless by Suburban's construction of the contract. The court granted summary judgment for Turner and enforced the pay-if-paid clause.

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In RRMM Design Build, LLC v. Marquis at Williamsburg, LLC, 215 RRMM Design Build, LLC entered into a contract with Premier Properties USA, Inc. to provide labor and materials in the...

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