Master Builders of Iowa

PUBLIC PROJECTS AND LIEN WAIVERS
By John Templer, Whitfiled & Eddy, PLC

The Iowa Code contains two separate regimes for subcontractors and suppliers to obtain payment if the general contractor or its subcontractors do not pay them.  On private projects, the appropriate remedy is found under Chapter 572, “Mechanics Liens.”  Under that process, an unpaid contractor, subcontractor or supplier may file a lien and file a foreclosure suit to enforce the lien.  The successful lien claimant can then obtain an order requiring the sheriff to sell the property in question to satisfy the lien claimant’s judgment.  Sec. 572.21.  In short, the value of the property itself secures the obligation to the unpaid general contractor/subcontractor/supplier.

The above scenario does not apply when the property in question is public property.  In that instance, Chapter 573 (“Labor and Materials on Public Improvements”) contains the appropriate remedy.  That a mechanics lien cannot confer any property rights against public property was made clear in Economy Forms v. City of Cedar Rapids, 340 N.W. 2nd 259, 263.  In that decision, the Court stated as follows:

• “Normally it is impossible to obtain a lien on public property.  [citing Lennox Industries, Inc. v. City of Davenport, cit. om.]  The General Assembly could reasonably believe that the public should not be exposed to liability for risks that are subject to the control of private contractors [and hence they enacted Ch. 573.]”

The Legislature enacted Ch. 573 to provide a remedy for unpaid subcontractor and suppliers (but not contractors) on public works projects.  Obviously, the interests of the taxpaying public would not be well served if its schoolhouses, fire stations and public parks were subject to foreclosure sales.

The scheme of Chapter 573 protects the public owners from claims of unpaid subcontractors/ suppliers as follows:

1. The act applies to all “public corporations.”  (Defined in Sec. 573.1.3)
    
2. A contractor who contracts to build a “public improvement” when the contract price equals or exceeds $25,000 must supply a payment and performance bond.  The “payment bond” inures to the benefit of the subcontractors and suppliers of the general contractor.  The “performance bond” inures to the benefit of the owner.  In this instance, the bonding company would be liable in the event of a contractor default to pay unpaid subs/suppliers and/or pay to complete the project.  Secs. 573.2; 573.6.  The bond is mandatory.  Sec. 573.3.
    
3. The owner is also entitled to retain up to five percent of the contractor’s billings until the end of the project and all claims are satisfied.  Sec. 573.12.  Thus the bond and the retention substitute for the value of the property were this private project.
    
4. An unpaid sub/supplier must properly file its claim under Chapter 573 in order to have rights against the retention or bond.  Sec. 573.7; 573.10.  Obviously, the unpaid sub/supplier cannot sue the public owner directly because of a lack of privity.  It still could bring a breach of contract action against its superior contractor, of course, but if that superior contractor is bankrupt, that action would be futile.  That is why adherence to the rules of Ch. 573 is so important for subcontractors and suppliers.
    
5. If an unpaid sub/supplier properly files its claim, the owner is required under the statute to withhold two times the amount of the claim from the contractor’s protection of subcontractors and suppliers.  Sec. 573.13.
    
6. The unpaid supplier/subcontractor has additional protection in the form of the payment bond.  Secs. 573.18 through 573.22 provide that if the retainage is exhausted through the satisfaction of claims, the unpaid claimants may then obtain judgment against the payment bond for any deficiency.
    
7. Therefore, under this statutory scheme, it is literally impossible for the public owner to be at risk if subcontractors or suppliers are not paid.  Notice also that nowhere in Chapter 573 will you find the word “lien.”

The requirement to provide “lien waivers” needlessly results in several problems:

1. As stated above, a “mechanic’s lien” against a public project is unenforceable under any circumstances.
    
2. Even if proper claims are submitted under Ch. 573, the public owner is never in jeopardy.
    
3. The logistical process of obtaining such waivers all down the contractual chain is time-consuming for the contractor, and generally will cause delays in finalizing the project.
    
4. The same goes for the design professional who has to collect and review these “waivers.”  Their services for doing this ultimately are reflected in their bill, either directly, if they are charging by the hour, or indirectly if they are on a lump sum contract, because that “service” is most likely built into the price.  The ultimate irony is that the public owner ends up paying for “protection” it clearly does not need.
    
5. A design professional that undertakes to require “lien waivers” subjects itself to a claim by an unpaid sub/supplier who has failed to properly follow the claims procedure set out in Chapter 573.  The argument is that the design professional should have explained the process to the sub/supplier.  There is a case in Minnesota in which the court held that if the design professional sought to require “lien waivers” when not required, by volunteering to do something that the law did not require, he subjected them, and since the design professional was requiring “waivers of liens” from them, they assumed that the design professional was acting on their behalf.  By not telling them the proper procedure under Ch. 573, the architect breached that assumed duty.  I suppose this falls under the rule that “no good deed goes unpunished” but it would be an unfortunate result if the design professional could be held liable for doing something he wasn’t even required to do.

Finally, as stated above, the fact that a lien waiver requirement is in the specifications does not change the above discussion.  All of the above statutory provisions are mandatory.  The parties cannot create by contract a right or remedy against public property (or create the impression that one exists) when the legislature itself has not provided such a right or remedy.