Protecting a Subcontractor or Supplier’s Right to Payment for Public Works

When a subcontractor or supplier is not paid for labor or materials provided at a non-public works project, the  subcontractor or supplier can file an affidavit for mechanic’s lien to protect and assert its right to payment. Public work and projects, on the other hand, are not subject to mechanic’s liens but the steps and notices required for a subcontractor or supplier to protect its right to payment is similar and, unlike a mechanic’s lien, results in a higher likelihood of recovering owed funds (consider, for example, an over mortgaged property). A claim for unpaid public work labor or materials is made by filing a claim against a statutorily required payment bond. This article addresses the many requirements imposed on a payment bond beneficiary by chapter 2253, which governs this process.

Chapter 2253 of the Texas Government Code is procedurally onerous but still relatively straightforward. Texas courts have liberally construed chapter 2253’s notice requirements but continue to require substantial compliance as a condition precedent to bringing a suit on payment bond. A suit on payment bond is likely to be dismissed for failure to comply with this chapter’s notice requirements. If the notice requirements are satisfied, a beneficiary can sue for unpaid labor or materials and costs and reasonable attorneys’ fees. A beneficiary can sue the principal or surety, jointly or severally, on the payment bond on the 61st day after the mailing of required notices.

As a preliminary matter, a payment bond is for the protection and use of payment bond beneficiaries, i.e., subcontractors or suppliers with a direct contractual relationship with the prime contractor or a subcontractor to supply public work labor or material. A prime contractor or subcontractor is required to obtain a payment bond on a public work contract that is over $25,000 if the owning governmental entity is not a municipality and over $50,000 if the governmental entity is a municipality. Good business practice would entail requesting a copy of the payment bond before providing any labor or materials on a public project. Prime contractors and subcontractors are both under a statutory obligation (under section 2254.024) to provide a copy of the payment bond. Conversely, the beneficiary, must provide any applicable written agreement or purchase order related to the public work being performed upon request.

The notices required and the dates by which they need to be sent to prevail in a claim for payment for public work performed or public work material delivered are as follows.

By the 15th day of the 2nd month after receipt and acceptance of an order. If you are a beneficiary that received and accepted an order for specially fabricated materials, you have an additional notice obligation to preserve your right to a future claim. The beneficiary must mail written notice to the prime contractor that the order for specially fabricated material has been received and accepted on or before the 15th day of the second month after the receipt and acceptance of an order. This latter step is important in the event the materials are not delivered or there is a payment issue.

By the 15th day of the 2nd month after public work labor or material delivered. The notice requirement is somewhat different for a beneficiary without a direct contractual relationship with the prime contractor. Before the beneficiary can make a claim on the payment bond, the beneficiary must mail to the prime contractor written notice of unpaid public work labor performed or material delivered. Best practice would be to send the notice to the surety, as well. Unlike a subcontractor’s notice, the supplier’s notice must be mailed on or before the 15th day of the second month in which the labor was performed or material delivered and include a sworn statement of account, which is explained further below.

By the 15th day of the 3rd month after public work labor or material delivered. A beneficiary in a contractual relationship with the prime contractor must mail to the prime contractor and surety written notice of its claim before it can file suit. The notice must be mailed before the 15th day of the third month after each month in which any of the claimed labor was performed or claimed material was delivered. Importantly, this notice must be accompanied by a sworn statement of account (i.e., a notarized statement), stating that the amount claimed is just and correct and all just and lawful offsets, payments, and credits have been allowed. To be comprehensive (and to satisfy a host of requirements), the claim should contain the following information: the name of the party for whom the beneficiary performed public work labor or to whom public work material was delivered or the approximate date of delivery, the date of performance or delivery, description of the public work labor or material for identification, and the amount due. The claim should also contain supporting documentation such as contracts, documents, invoices, or purchase orders.

Specially fabricated materials not delivered. Chapter 2253 does not address this scenario. Relevant provisions all contemplate notice provided after delivery of those materials is complete, but not one where the materials are not delivered. This situation may arise where a prime contractor or subcontractor orders specially fabricated materials and does not provide payment or delivery instructions and fails to do so for an extended period. There is little guidance on a beneficiary’s rights in such a situation, but the procedure outlined in chapter 53 of the Texas Property Code provides some insight. Under that chapter, the beneficiary who specially fabricates material must provide notice upon receipt and acceptance of the order to fabricate those materials. Then, upon nonpayment and without the need to deliver the materials, a beneficiary can perfect its mechanic’s lien by sending the third month notice. While it has not been adjudicated, best practice under chapter 2253 to perfect a claim on payment bond would include following these steps.

Any notice sent under this chapter must be sent by certified or registered mail. If the notice is directed to the prime contractor, it must be sent to the prime contractor’s residence or last known business address. If the notice is directed to the surety, the notice must be sent to address stated on or attached to the bond, the address on file with the Texas Department of Insurance, or at any other address allowed by law. As recommended practice, any notice should always include the prime contractor.

 

Rishabh Agny is a construction lawyer and commercial litigator at The Chapman Firm PLLC.