A question frequently asked by owners and contractors is when enough is enough and termination is justified. As a preliminary matter, immediate termination for a non-compliant contractor or subcontractor is never a good idea. Mississippi jurisprudence requires that notice (preferably in writing) should be given to the non-compliant party with an opportunity to cure the alleged defect. The decision to terminate is never easy and viewed by the court as an extreme remedy. Nonetheless, the court has also recognized that termination may be warranted where repeated attempts to cure have been ineffective.

Any notice of termination should be in writing identifying the "material breach" justifying the termination and entitlement to damages associated with completing the terminated scope of work. The owner or contractor should also secure a number of quotes/prices to complete the work. This will assist the owner or contractor from being accused of securing an unreasonable or excessive price to complete the terminated scope of work. Remember, any change in the original scope of work or "betterment" could be grounds for the terminated party to challenge all or a portion of the claimed damages.

The Legislature has completely rewritten the Mississippi lien law for commercial and residential projects.  Senate Bill 2622 has now been sent to the Governor for his signature and provides lien rights to prime contractors, subcontractor and material suppliers. [Link to SB 2622]  The new lien law will require those seeking to file a lien to comply carefully with strict notice and filing requirements.  An error in complying with these requirements could lead to a “claim of lien” being ineffective or unenforceable. 

Some of the key points in the new lien law are:

     

  • There are no lien rights if a contractor has provided a payment bond. (Miss. Code Ann. §85-7-431)

     

  • To have lien rights the party filing a "claim of lien" must be properly licensed by the Mississippi State Board of Contractors.  However, it should be noted that there are counties and municipalities that also have licensing requirements. (Miss. Code Ann. §85-7-403)

There are numerous ways that a contractor and/or subcontractor or materialman can lose its "claim of lien", including:

     

  • If the contractor fails to provide a list of subcontractors to the owner within a reasonable period of time after requested or if the subcontractor fails to furnish a list of its subcontractors to the contractor within a reasonable period of time after requested (Miss. Code Ann. §85-7-407).

     

  • If lien claimant fails to file its "claim of lien" within ninety (90) days following the last labor, services or materials provided (Miss. Code. Ann. §85-7-405(1)(b)).

     

  • If a subcontractor not in privity with the contractor fails to send written notice to the contractor, or, if there is no contractor, to the owner, within thirty (30) days after the first delivery of labor, services or materials to the property. (Miss. Code. Ann. §85-7-407(2))

     

  • If the owner has made payment to the contractor in reliance upon a lien waiver issued by the lien claimant (Miss. Code Ann. §85-7-413(1)(a)).

     

  • If a "payment action" is not commenced within one hundred eighty (180) days after the "claim of lien" is filed, the "claim of lien" is unenforceable (Miss. Code Ann. §85-7-421(1)).

The basic requirements for filing a "claim of lien" are set forth in Miss. Code Ann. §85-7-405.  If a party fails to comply with any of the requirements the "claim of lien" shall not be effective or enforceable.  The filing of a "claim of lien" is not intended to prejudice a party’s right to arbitration.

     

  • The right to claim a lien cannot be waived in advance of furnishing labor, service or materials (Miss. Code Ann. §85-7-419).

     

  • The "special lien" granted by the statue to contractors, subcontractors and materialmen is limited to the amount due and owning under the terms of the express or oral contract, subcontract or purchase order (Miss. Code Ann. §85-7-403(3)).  The "special lien" also includes interest (Miss. Code Ann. §85-7-403(4)).

     

  • A judgment secured in a "payment action" to enforce a "claim of lien" is limited to a judgment in rem against the property and does not impose any personal liability upon the owner (Miss. Code Ann. §85-7-405(1)(d)(ii)).

     

  • If payment is made by the owner in reliance of a lien waiver or statements of the contractor, the aggregate lien amount of the subcontractors and materialmen not in privity with the contractor shall not exceed the unpaid balance of the contract price between the owner and the contractor at the time the first notice of lien is filed (Miss. Code Ann.§85-7-405(5)(a)).

     

  • Party seeking to assert a "claim of lien" must be in "substantial compliance" with the contract, subcontract or purchase order (Miss. Code Ann. §85-7-405(1)(a)).

     

  • "Claim of lien" must be filed in the chancery court of the county by a contractor, subcontractor or materialman where the property is located and within ninety (90) days of the last labor, services or materials provided.  It must also contain certain language notifying the owner of its right to contest the lien and be sent to the owner and contractor within two (2) days after it is filed (Miss. Code Ann. §85-7-405(1)(b)).

     

  • A subcontractor or material supplier not in privity with the contractor, or, if there is no contractor, with the owner, must provide notice within (30) days following the first delivery of labor, services, or materials as a condition precedent to filing a "claim of lien" (Miss. Code Ann. §85-7-407(2)).

     

  • The "claim of lien" can be amended at any time provided there is compliance with certain procedures (Miss. Code Ann. §85-7-405(1)(e)).

     

  • All liens under Miss. Code Ann. §85-7-403 have equal priority.  If the proceeds are insufficient to satisfy all liens, distribution is on a pro-rata basis (Miss. Code Ann. §85-7-403(3)(d)).

     

  • A "payment action" (lawsuit) to enforce the "claim of lien" must be commenced within one hundred eighty (180) days from the date of the filing of the "claim of lien" (Miss. Code Ann. §85-7-405(1)(c)).  This period can be shortened by the owner or contractor filing a "Notice of Contest of the Lien". (See, Miss. Code Ann. §85-7-423(1))

     

  • A lis pendens notice must be filed with commencement of the "payment action" and furnished to the owner and contractor (Miss. Code Ann. §85-7-405(1)(d)(ii)).

     

  • The court in its discretion may award reasonable costs, interest and attorney’s fees to the prevailing party in an action against the owner to enforce a lien against the property (Miss. Code Ann. §85-7-405(3)(c)).

     

  • The statute provides a procedure for "bonding off" a lien.  The amount of the bond is required to be one hundred ten percent (110%) of the amount of the "claim of lien" (Miss. Code Ann. §85-7-415).

There are also substantial penalties for not complying with certain aspects of the lien law and filing a false "claim of lien".

     

  • The penalty for filing a knowingly false "claim of lien" is three (3) times the value of the "claim of lien" (Miss. Code Ann. 85-7-429).

     

  • The penalty for not paying a subcontractor after securing a waiver and release of lien without good cause is three (3) times the amount claimed on the face of the waiver and release (Miss. Code Ann. §85-7-407(3)).

     

  • There is a penalty of three (3) times the actual damages suffered by an owner, purchaser or lender if the contractor falsely and knowingly submits a statement that the agreed price or reasonable value of the labor, services or materials has been paid or waived in writing by the lien claimant. (Miss. Code Ann. §85-7-413(1)(b))

     

  • There is a penalty for failing to cancel a "claim of lien" if not accomplished within fifteen (15) days after fully paid of not less than $500/day plus reasonable attorney’s fees and costs. (Miss. Code Ann. §85-7-421(3))

Residential projects require a slightly different process.  Lien claimants on residential projects must give the residential owner a pre-lien notice at least ten (10) days notice before filing a "claim of lien". (Miss. Code Ann. §85-7-409(2))

This is just a taste of what the new Mississippi lien law contains and is neither intended to be a complete summary of the new lien law nor should it be solely relied upon in filing a "claim of lien".  The new statues are filled with hoops to jump through and hazards for those who have not carefully read it.  If you have any questions about this Mississippi’s new lien law you can contact Christopher Solop at csolop@bislawyers.com, Lynn Thompson at lynnthompson@bislawyers.com or go to the website for Biggs, Ingram & Solop, PLLC at www.bislawyers.com.

On October 10, 2013, the Fifth Circuit Court of Appeals affirmed a district court determination that Mississippi Code Annotation § 85-7-181 is unconstitutional. As prime contractors and owners know, an owner’s receipt of a stop-payment notice or "stop notice" could bring the flow of contract payments to a grinding halt. Miss. Code Ann. §85-7-181 required an owner to hold sufficient funds, otherwise due to a prime, to cover the amount alleged to be due and owing to a first-tier subcontractor who sent written notice that it was claiming the benefits of the "stop-payment" notice statute. Depending upon the amount of contract funds still remaining in the owner’s hands, if the owner paid the prime over the notice and thereby diminished sufficient funds available to pay the subcontractor, the stop-payment notice statute made the owner directly liable to the subcontractor. Owner-compliance, as intended by the statute, gave subcontractors (at least the first-tier) their only powerful tool to enforce payment rights on private, un-bonded projects.

The "stop-notice" statute has been in place for year, but on April 12, 2012, the Northern District of Mississippi ruled the statue unconstitutional on its face because it deprived prime contractors of property without due process. Noatex, an unlicensed California prime contractor, was hired by Auto Parts Manufacturing Mississippi ("APMM") to build an auto parts manufacturing facility. Noatex got into a billing dispute with its Mississippi subcontractor, King Construction of Houston, L.L.C. When King Construction sent a stop-payment notice to APMM asserting it was due over $260,000 from Noatex, that amount became bound in the hands of APMM. Noatex filed a declaratory judgment action, challenging the stop-payment notice statute as facially invalid and invalid as applied. The State of Mississippi, through the Attorney General’s Office, intervened in support of the stop-payment notice statute. Judge S. Allan Alexander agreed with Noatex, holding that simply by giving written notice of an alleged debt a contractor’s payment became bound in the hands of the owner—with no hearing before the money was bound—and thus the contractor was deprived of its property without due process.

The Fifth Circuit upheld Judge Alexander’s analysis. Among other things, the Fifth Circuit noted that the statute is "profound in its lack of procedural safeguards": no posting of a bond, no showing of exigent circumstances, and no sworn statement setting out the facts of the dispute. You can read the decision here.

Unless there are changes to the current stop payment law or the United States Supreme Court agrees to consider this issue, if appealed by the Mississippi Attorney General, there will be no "lien rights" for first-tier subcontractors. Only contractors with a direct contractual relationship with the owner will have lien rights.  Subcontractors may want to seek legal counsel concerning how to address stop payment notices that were to be filed or have been filed and to determine other remedies that may be available if their prime has failed to make payment.   

The Mississippi Court of Appeals has reaffirmed that a subcontractor must file a "Stop Payment Notice" prior to an owner making full payment to the general contractor. Otherwise, the subcontractor loses any hope of payment from the owner based upon that notice and the exclusive remedy for payment is against its general contractor.

In the recently published decision of Summerall Electric Co., Inc., et al. v. Church of God at Southaven, the Church of God at Southaven ("the Church") entered into a contract with an unlicensed general contractor for the construction of a new church. The general contractor engaged a number of subcontractors who performed work on the church but were not paid by the general contractor. The subcontractors filed "construction liens" against the church’s property. However, the subcontractors did not take this action until after the owner had already paid the entire contract amount to the general contractor.

The subcontractors advanced a number of arguments seeking to recover their money directly from the Church.

  • The first argument was that the filing of the "construction liens" gave the subcontractors the right to recover against the Church. The Court disagreed because the Church had already paid the general contractor in full when the subcontractor’s notices were filed. For that reason, the subcontractors were mere creditors of the general contractor with no right to recover from the Church.  
  • The next argument was that because the Church entered into a contract with an unlicensed general contractor the Church should be liable. Under Mississippi law, a construction contract is null and void if a license is required for that contract. The subcontractors apparently argued that because the general contractor was unlicensed the prime contract was null and void and the Church therefore owed payment directly to the licensed subcontractors. The Court disagreed again, finding if the prime contract was null and void, then nothing would be owed to the general contractor and therefore the subcontractors would have no remedy either.
  • Finally, the subcontractors argued that there was an "agency relationship" between the prime contractor and the Church which bound the Church directly to the subcontractors. The Court rejected that argument too on the basis of insufficient evidence.

In the end, the subcontractors were left "holding the bag." The real lesson here is for both subcontractors and general contractors. Know when you are required to be paid and, if payment is late, exercise your remedies under the contract document and the appropriate payment statutes. The saying: "He who hesitates is lost", is not just a cliché but a truism that cannot be ignored in these difficult economic times.