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Texas Construction Law Blog For Subcontractors & Suppliers

Rights and Remedies to Help Subcontractors and Suppliers Collect Payment

Posted in Bonds, Collection, Liens

Nonpayment is the biggest threat to most subcontractors’ and suppliers’ bottom lines.  Nonpayment frequently occurs in the construction and oil and gas industries because most goods and services are sold on credit.  C.O.D. sales are uncommon and payment upfront is almost unheard of.  Because of this practice, nonpayment is one of the most common legal problems facing suppliers and subcontractors.  Fortunately, Texas law provides subcontractorss and suppliers with several rights and remedies that  help solve this problem:

Statutory Mechanic’s and Materialmen’s Lien – Texas law allows a subcontractor and supplier to file a lien against privately owned real property that they furnished labor and/or materials to improve.  To perfect this lien the subcontractor is required to timely send notice to all required parties and to timely record a lien affidavit.  This is the best way to ensure payment on a private unbonded project.  If you ignore your lien rights, you are likely throwing money away.

Texas Public Payment Bonds – You cannot lien public real property.  Instead, you typically have a claim against the payment bond, which is required for public projects in excess of $25,000.  These bond claims are perfected by sending notices (including a sworn statement of account) to the general contractor, the surety, and, if you are a second tier sub or supplier, to the first tier subcontractor that you have a contract with.

Private Payment Bonds – On some privately owned projects, the general contractor posts a payment bond.  If you are an unpaid subcontractor or supplier on this type of project, you have a claim against the payment bond.  You can perfect your claim by following the steps to perfect a statutory mechanic’s lien (described in Section 1).

Federal Public Payment Bonds – For claims arising for unpaid labor or materials furnished to projects owned by the federal government, you must perfect a Miller Bond claim by timely sending notice.  This is the same idea as the Texas public payment bonds and it involves a similar procedure.

Constitutional Lien – If you have a direct contract with the owner of a “building” or “article” and you supplied labor and/or materials to improve the building or article, you may have a constitutional lien.  A constitutional lien does not require notice, although you must record a lien affidavit.

The Construction Trust Fund Act – This Act imposes a fiduciary duty on owners who receive construction loans as well as general contractors and subcontractors who receive funds for the project.  These parties are trustees under the Act and their fiduciary duty requires them to pay the funds they receive to their downstream contractors.  Misappropriating these funds when downstream contractors are unpaid gives rise to liability.

Prompt Pay Acts – The Prompt Pay Acts, for both public and private projects, impose duties on owners, general contractors, and subcontractors to pay their down stream contractors within certain periods of time.  A failure to do so gives rise to interest, attorney fees, and other rights.

Mineral Lien – Texas law provides the right to file a mineral lien to those who furnish labor and/or materials to oil, gas, or water well, an oil or gas pipeline, or a mine or quarry.  The requirements to perfect a mineral lien are similar to those required to perfect a mechanic’s lien: timely notice and timely recording the lien affidavit.  However, the notice and lien affidavit deadlines are not as fast as mechanic’s liens.

Personal Guaranty – Personal guarantees are nice to have because they provide another avenue to satisfy the debt.  But, they are only as good as the guarantor’s ability to pay.

Joint Check Agreement – There are no statutory requirements for these agreements, but the typical joint check agreement merely obligates a general contractor to make the check payable to the subcontractor and the subcontractor’s supplier.  This is a mediocre way to secure payment because these agreements typically do not obligate the general contractor to pay you and these agreements sometimes are loaded with unfavorable provisions.

The Unpaid Account – If you do not take advantage of the alternatives above, you are left with an unpaid account claim against your customer.  This is the weakest of the claims and is only as good as your customer’s ability to pay.

In the next several days, I am going to blog about each of these options in more detail.  Stay tuned.