Consider this all-too-common scenario. Owner of a parcel of real estate contracts with Contractor to construct a building. Contractor contracts with Subcontractor to perform labor and provide materials for the construction. Owner pays Contractor upon completion of the building. Contractor fails to pay Subcontractor for its labor and materials and files bankruptcy. Can Subcontractor hold Owner liable for the amount owed to Subcontractor by Contractor?
Generally, the answer is no. A subcontractor cannot hold an owner personally liable for a contractor’s failure to pay because the subcontractor does not have “privity” with the contract between the owner and the contractor. In other words, because the owner has not contracted with the subcontractor, the subcontractor has no claim against the owner. Unless a court finds an equitable basis to hold the owner personally liable, the subcontractor’s remedy is typically limited to claims against the contractor.
This can lead to a harsh result for the subcontractor. In order to protect the subcontractor, the Indiana legislature has passed a law commonly referred to by construction lawyers as the “personal liability” or the “notice-to-owner” law. While this law is part of the mechanic’s lien chapter of the Indiana Code, it relates more to the personal liability of the owner as opposed to true mechanic’s liens.
Under the personal liability law,
(1) a subcontractor;
(2) a lessor leasing construction equipment or tools;
(3) a journeyman; or
(4) a laborer
can protect itself by giving notice to the owner of his or her intention to hold the owner responsible for the indebtedness of the contractor to that person. If the owner pays the contractor after receipt of such a notice, and the contractor fails to pay the subcontractor, the subcontractor has a claim for personal liability against the owner. The statute effectively makes the owner the guarantor of the contractor’s obligation to the subcontractor, but only the extent the owner still owes money to the contractor on the project. It allows the subcontractor to “leap-frog” the contractor to reach the owner.
The contents of the notice-to-owner are strictly set out by law. The law also has rules that may potentially limit the amount recoverable by the subcontractor. To get the maximum benefit of this statute, a subcontractor should contact legal counsel as soon as any problem with payment arises.
Tags: construction materials, personal liability law, subcontractor contracts