By: Paul R. Fitzgerald, Esq.
As regular readers of this newsletter know, a mechanic’s lien is a tremendously effective tool for getting paid on private construction projects. Oftentimes, just the threat of a lien will facilitate prompt payment. However, there may be times when it is not possible or advisable to file a lien. For example, you may have missed the deadline to file. Or perhaps there is insufficient equity in the property to make filing a lien worthwhile. It is even possible that your lien might be discharged because the general contractor on the project filed a lien that includes amounts due to you.
Whether you failed to file a lien, chose not to file a lien, or filed a lien and also would like to utilize an additional collection tool, you should be aware of Connecticut’s Fairness in Construction Financing Act (“the Act”). The Act applies to most privately-owned construction projects in the State and provides contractors and suppliers with significant leverage when dealing with non-paying owners or general contractors.
This article discusses the Act, how you can use a specific provision of the Act to get paid, and compares the Act to Connecticut’s mechanic’s lien laws.
A supplement to Connecticut’s mechanic’s lien laws: Connecticut’s Fairness in Construction Financing Act.
The Fairness in Construction Financing Act, Connecticut General Statutes §42-158i et seq., provides contractors and suppliers with significant assistance in procuring payment, particularly retainage, on many types of private construction projects. The Act, which applies to private commercial and industrial construction contracts valued at more than $25,000.00, as well as residential contracts with more than four units, gives courts the power to award a claimant its attorney’s fees, interest, and even punitive damages if it is found that payments were “unreasonably withheld” from the contractor or supplier or were withheld in bad faith.
Pursuant to the Act, project owners must pay amounts due for labor and materials within 30 days after receiving a written payment request. The Act also requires that general contractors pay for labor and materials within 30 days after the general contractor receives payments for such labor and materials from the project owner. Should a general contractor fail to make payment to a subcontractor within 30 days of receiving payment for the subcontractor’s work from the project owner, the subcontractor can set forth its claim against the general contractor through a demand made by certified mail. Ten days after the receipt of the demand, the general contractor shall be liable for interest on the amount due at the rate of 1% per month. In addition, the general contractor must place the funds, plus interest at the rate of 1% per month, in an interest-bearing escrow account
Significantly, the Act also establishes a subcontractor’s right to sue a project owner directly for late payments after providing notice of nonpayment to the owner. This provision is very important because it eliminates the problem encountered by many subcontractors with so-called “pay when paid” clauses.
How does a claim under the Act differ from a mechanic’s lien?
There are a number of important differences between a demand made pursuant to Conn. Gen. Stat. §42-158j and a mechanic’s lien:
- Exclusions. Liens may be filed on any private project where the value of the work performed is more than $10.00, whereas §42-158j only applies to projects valued at more than $25,000.00, and the statute does not apply to residential properties containing 4 units or less.
- Impact on project funding. Liens get the immediate attention of the project lender and can interfere with funding, which often facilitates a quick resolution. There is no comparable pressure on the lender with a $42-158j demand.
- Security for claim. Liens attach to the property itself, so assuming there is sufficient equity in the property and no prior liens or mortgages, the lienor is assured of payment. If the owner/general contractor refuses to place funds in escrow, there is no similar security with a §42-158j claim.
- Attorney’s fees. A lienor must foreclose the lien, which can be costly, but after having done so, attorney’s fees are recoverable. With a §42-158j claim, attorney’s fees are only recoverable if the owner or general contractor refuses to place funds in escrow and a court ultimately determines that the owner/general contractor “unreasonably withheld payment.”
- Cost and expense. While effective, liens can sometimes be time-consuming and expensive to file and foreclose; a §42-158j letter is quick and easy, and a §42-158j lawsuit is much simpler than a foreclosure complaint.
- Time limitations. There are strict time frames governing liens: 90 days to file and 1 year to foreclose; whereas there are no explicit time limitations on §42-158j claims.
- Punitive damages. Ten percent (10%) punitive damages are recoverable under §42-158j if the claimant can demonstrate that the owner/general contractor acted in bad faith; there is no similar remedy available for lienors.
Mechanic’s liens and §42-158j demands are non-exclusive remedies.
In recognition of the important work that is performed by subcontractors and suppliers in the State, the Connecticut Legislature has enacted laws to ensure that these construction professionals are paid promptly and in full for their labor and material. Connecticut’s lien statutes permit contractors to secure their claims by attaching property, and Connecticut’s Fairness in Construction Financing Act allows contractors to recover attorney’s fees, interest, and punitive damages when payments are withheld in bad faith. It is important to note that mechanic’s liens and §42-158j claims are not mutually exclusive; we recommend that claimants do both, whenever possible.
If you have any questions about Connecticut’s Fairness in Construction Financing Act or mechanic’s lien laws, or need assistance getting paid for your work on a project located in the State, please call MKRB at 860-522-1243.
Michelson, Kane, P.C.
