Paul Norris is a shareholder of Stark & Stark in Lawrenceville, N.J., and a member of the firm’s construction litigation group. His e-mail address is pnorris@stark-stark.com.

Subcontractor or Supplier - A Definition That Matters

Defining a subcontractor or supplier role may not seem important, but it is a critical factor in deciding whether companies can file a lien.

by Paul W. Norris

What is a subcontractor? Although this may seem like a simple question, whether a party can be classified as a subcontractor or simply a material supplier can go a long way toward determining a company’s rights to file a lien claim or bring a claim against a bond.

 In general, a party’s right to file a lien against private property is the same as a party’s right to bring a claim against a payment bond on either a municipal project or a federal project. Government owners usually require general contractors to post payment bonds because parties cannot file liens against public property.

A prime subcontractor or supplier to a general contractor is typically eligible to file such a claim, which usually occurs after a dispute over payment. In addition, some lower-tier subs are also able to file claims. For instance, the subcontractor to a primary subcontractor, and even the supplier to a subcontractor, are also both able to file a claim against a bond or a lien.

But the rights do cut off. Specifically in federal and New Jersey law, for instance, a third-tier or lower subcontractor cannot bring a claim against a bond or file a lien. For suppliers, the cutoff comes even sooner – any level after a first-tier supplier is ineligible for such claims.

At that point, the supplier or subcontractor definition can become critical to the owner or general contractor facing lien or bond claims, and to the subcontractor or supplier intent on pursuing lien or bond actions. And the determining body is usually a court of law.

There is no clear standard to determine whether a party is a supplier or a subcontractor. In general, the court may consider various factors on a particular project, such as:

• the format of the contractual documents

• whether the party was required to obtain a performance or payment bond or was subject to terms and conditions of the prime contract

• whether retainage was held by the general contractor from the supplier or subcontractor, and whether they used progress payments or lump-sum payments

• whether the supplier or subcontractor performed any onsite labor, played any role in the design of the structure, or undertook duties not customarily expected of it in its industry

• and the percentage of project cost in which the supplier or subcontractor participated, whether it submitted change orders, and the overall importance of its role on the project.

 While it is a factually sensitive determination as to whether a party is classified as a subcontractor or a material supplier, the facts of the case are paramount: A supplier can be deemed a subcontractor on one job and a supplier on another.

These matters can prove critical. Recently, I defended a general contractor on an aircraft hangar construction project against a claim brought against its bond by a custom steel fabricator that was providing materials to a primary supplier on the project.

While my client had already faced a separate, successful claim against the bond by the first-tier supplier, the court in the second-tier case ruled against the steel fabricator, finding that it was not a subcontractor under the federal Miller Act but rather a material supplier. That left the steel firm unable to file a claim against the bond, and averted a potential $600,000 judgment.

Some steps that developers and contractors have taken to limit their liability in the face of such uncertainly include requiring suppliers or subcontractors to post bonds on public projects. On commercial projects, they require suppliers or subcontractors to disclose their contracting parties, agree to non-assignability provisions, or sign a lien waiver that says the party has paid all of its sub-suppliers or contractors upon receipt of progress payments.

Obviously, lien or claim issues become problematic when subcontractors or suppliers fail to pay their own subcontractors or suppliers. But if a first-tier subcontractor or supplier files bankruptcy, the damage could cut one of two ways – either in the favor of owners and developers who shielded themselves from claims of sub-parties or in favor of sub-parties.