Chapter II Practical Considerations

• Library: Turner on Illinois Mechanics Liens (2016 Ed.)

CHAPTER II - PRACTICAL CONSIDERATIONS

The purpose of this Chapter is to provide information a lawyer should have when first representing a client who may wish to assert or defend against a mechanics lien claim. Most of what is discussed here is more fully discussed in other chapters. This Chapter contains information to help the lawyer avoid traps for the unwary and what the author hopes is good practical advice.

PART I - EDUCATING THE CLIENT BEFORE THERE IS A PROBLEM

Some preconstruction, performance, and payment issues can be avoided by certain business practices if they are followed by the client. These practices include, for example, keeping records of work done and material used, reviewing contracts, regularly reviewing receivables, and consulting with an attorney if payment is not received for work within 60 days after it is performed. A lawyer should seek to educate his or her clients in these matters. Proper procedures are often necessary or at least very helpful to contractors and subcontractors in enforcing mechanics lien rights, and to owners, lenders, and title companies in avoiding wrongful payments and payments for work not done or done incorrectly. It is critical for the client to involve its attorney at the right time.

The claimant should be equipped with proposal and contract forms, sworn statements, waivers, and similar documents used in normal construction business activities that have been prepared and reviewed by a competent attorney. Each form should include instructions on its proper use.

The instructions should always state that if a situation arises that is not covered by the instructions to the form, the client should contract the attorney for further instruction. Misuse of forms due to an effort to save legal expenses often turns out to be very expensive. For example, some clients think they can prepare and serve their own mechanics lien notices of claim or recordable lien claims. At one time, this may have been true, but over the last 35 years, mechanics lien law has become more complicated and the requirements for precise information more compelling and more restrictive. Mechanics liens should always be prepared by or under the supervision of a knowledgeable lawyer.

Care should be taken to have documents and practices comply with existing laws. While noncompliance will not necessarily invalidate the lien, noncompli-ance may very well result in creating defenses or counterclaims for the other party. Many of the applicable laws can be found in 815 ILCS 205, 505, 510, 513, 515, 601, and 603. Any draft contract should be checked to make sure that it does not violate these provisions and takes them into account. For example, in considering a contractual interest rate for amounts past due, the attorney should remember that the Mechanics Lien Act includes an interest rate of 10% per annum.¹

A. Funding for the Job

Contractors, subcontractors, and lenders should not allow work to be done until financing is available. This usually means not beginning work unless or until the construction loan has been opened or the owner has produced other evidence of funding for the project. Otherwise, work will be done and there may be no money to pay for it. This often results in failed projects where everyone loses.

B. Preconstruction Issues

1. Plans and Specifications

The preconstruction issue that creates the most problems is the lack of adequate or complete plans. Unless there is an agreement to the contrary, the party providing the plans and specifications is the party responsible for their completeness and accuracy. This means the owner is responsible to the contractor and the contractor is responsible to the subcontractors.

There is an implied warranty by the owner that the plans and specifications provided by the owner will allow the contractor to construct the improvements successfully thus allowing the contractor to perform fully its part of the con-tract.² If the contractor is bound to build according to plans and specifications prepared by the owner or his architect, the contractor will not be responsible for the consequences of defects in the plans and specifications.³ But if the contractor does not comply with the plans, it cannot escape responsibility for defects in its work.⁴

However, a contractor can assume by contract a greater responsibility than merely following plans and specifications.⁵ This can happen by responding to an invitation for bids, by signing a contract that shifts risk to the contractor, by not conforming its work to the plans and specifications, or by going beyond the scope of the plans and specifications. The contractor departs from plans and specifications at its peril. Contract documents should be carefully examined before they are accepted and signed. The best approach is to discuss the risks of the project and allocate them fairly when the contract is being negotiated. People are generally more willing to be fair at this point than when there is an actual problem.

Most important, the plans must be complete and adequate to do the job. Incomplete plans lead to costly change orders that often make the funding of a project "out of balance." That means there may be no money to pay for the extra work covered by the change orders. This often leads to litigation and sometimes failed projects.

2. Making Sure there is a Legally Enforceable Contract

Relying on a letter of intent and starting work before there is an actual signed contract and subcontract can cause a project real trouble. If there is no clear written contract, the terms of the agreement may be subject to extensive and expensive litigation.

One horrible example is Quake Construction, Inc. v. American Airlines, Inc.⁶ In Quake, there was a letter of intent. The Supreme Court held that the letter of intent was ambiguous as to whether it was a contract, and if it was not, the plaintiff could still sue based upon promissory estoppel. Whether there was a contract, what its terms were, and what the plaintiff was entitled to receive based upon promissory estoppel were issues of fact. The Court held that the issues in the case were dependent on the parties' intent. The Court said:⁷

Neither we nor the appellate court have decided whether in fact a contract exists, that is, whether the parties intended to be bound by the letter. We merely hold that the parties' intent, based on the letter alone, is ambiguous. Therefore, upon remand, the circuit court must allow the parties to present other evidence of their intent. The trier of fact should then determine, based on the evidence and the letter, whether the parties intended to be bound by the letter.

In other words, whether there was a contract and what its terms were would be determined by a judge or jury after a trial. Not a happy result. Disputes as to whether there is a contract and what the contract means can lead to a failed project.

The principal reason for this kind of tragedy is that owners and contractors want work to proceed before there is a final signed agreement. The way to avoid this problem and still have the work go forward is to have an interim agreement on a portion of the work to be done and its price while the contract is being finalized. This will avoid "gotcha" games involving form proposals, form letters of intent, and form purchase orders. It will also prevent contracts from being formed for materials under the Uniform Commercial Code when there is no complete written agreement on terms for work and labor.⁸

In one unreported case, the parties had an agreement for initial work. When that work was completed, the parties could not agree on the terms for the remaining work. The owner wanted the contractor to keep working while they continued negotiating. There was never a signed contract. One issue was whether the interim agreement covered the later work. One party contended that the agreement was contained in unsigned drafts of a very different contract. A lawyer should strongly advise his or her client not to do any work or permit any work to be done unless there is a signed agreement covering the work and agreeing to the price.

3. Reviewing the Contract or Subcontract

a. In General

All parties should carefully review the terms of contracts and subcontracts. Among the subjects that should be reviewed are:

(1) Whether there are flow down (incorporation by reference) clauses in subcontracts and to what extent they incorporate by reference the terms of the contractor's contract with the owner;
(2) Provisions for plans and specifications, and especially the identification of these plans and specifications by the author (the architect or engineer who prepared them), the date, and whether any supplements or addenda are included;
(3) Standards of performance;
(4) Provisions for inspection, testing, and cure of failures to pay or perform;
(5) Times for performance, including any schedule of work;
(6) Requirements for permits, licenses, and similar documents, and who is to furnish them;
(7) Requirements for submittals by the contractor, the subcontractors, secondary subcontractors, and suppliers;
(8) Warranties and any disclaimer of warranties, including the warranty of habitability;
(9) Indemnity and insurance requirements for all parties;
(10) Requirements for payment and performance bonds;
(11) Provisions for changes in the work, change orders, and directions by the owner, contractor, and architect or engineer;
(12) Dispute resolution provisions, including requirements for submitting issues to the architect or engineer, mediation, arbitration, or filing suit in particular courts;

(13) Payment conditions and procedures, including retention of a percentage of each draw and when such retention will be reduced or paid out entirely;
(14) Provisions determining responsibility for coordinating the work;
(15) Provisions for charge backs and deductions;
(16) Assumption of risk and responsibility for concealed conditions;
(17) Cancellation for convenience or for

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