On large construction projects, it is common for significant labor or materials to be supplied by lower-tier subcontractors and material suppliers – that is, entities who do not contract with the general or prime contractor, but instead contract directly with a subcontractor. Without a direct contractual relationship, the prime contractor may not know the identity of all lower-tier subcontractors or suppliers. As a result, the prime contractor may lack sufficient information to ensure that lower-tier subcontractors or suppliers have been paid before releasing payment to its subcontractor. The prime contractor may first learn the identity of lower-tier subcontractors or suppliers when they contact the prime contractor claiming that they have not been paid for their labor or materials or when they file a mechanic’s lien or payment bond claim.
However, remote subcontractors and suppliers may avoid this situation by sending a Notice of Furnishing Labor or Materials to the general contractor before supplying labor or materials. This provides notice to the prime contractor of the identity of lower-tier subcontractors and may help subcontractors get paid.
Do it Right!
South Carolina law requires that a Notice of Furnishing Labor or Materials be sent to the prime contractor by certified or registered mail. S.C. Code Ann. § 29-5-20. Section 29-5-20 also outlines a number of requirements that the notice must include to be effective. Specifically, the Notice of Furnishing must include:
(1) The name of the lower-tier subcontractor or supplier;
(2) The name of the subcontractor with whom lower-tier subcontractor or supplier contracted;
(3) A description of the labor, services or materials provided;
(4) The contract price or value of the labor or materials provided;
(5) A description of the project for which the labor, services or materials were provided;
(6) The date when the materials were provided or are scheduled to be provided; and
(7) The amount claimed to be due (if any).
In addition to providing notice to the prime contractor, the Notice of Furnishing Labor or Materials also affects the legal positions of the prime contractor and remote subcontractors or suppliers if the subcontractor later files a mechanic’s lien or payment bond claim. For example, if a subcontractor or supplier serves a Notice of Furnishing, the prime contractor cannot assert a payment defense against a remote subcontractor’s mechanic’s lien or payment bond claim. This is critical because it means that the prime contractor has to pay a lower-tier subcontractor even if it has already paid the first-tier subcontractor. This is so because service of the Notice of Furnishing imposes an obligation upon the prime contractor to ensure that a lower-tier subcontractor is paid before it releases funds to a first-tier subcontractor.
Conversely, if a subcontractor does not provide a Notice of Furnishing, the prime contractor can assert that it has paid the first-tier subcontractor as a defense to a mechanic’s lien or payment bond claim. In other words, if the prime contractor is not provided notice of a lower-tier subcontractor or suppliers’ participation in the project, then it won’t have to pay twice for the same work provided that the prime contractor properly filed and posted a Notice of Project Commencement in accordance. S.C. Code Ann. § 29-5-23.
If you have any questions concerning a Notice of Furnishing, South Carolina Mechanic’s Liens or Payment Bond Claims, please feel free to contact the construction law attorneys of Gibbes Burton, LLC at (864) 327-5000.