A recent case out of Indiana, Feitler v. Springfield Enterprises, addressed two interesting issues: whether “no-lien clauses” in construction contracts are valid and whether parties who are prevented from filing mechanics liens due to no lien clauses can still recover under Indiana’s personal liability statute.
What is a No-Lien Clause?
As we’ve discussed in the past, only a minority of states permit property owners and general contractors to include no-lien clauses in construction agreements. A no-lien clause contractually prevents any unpaid subcontractor from filing a mechanics lien regardless of whether they are paid or not. It is signed before they ever start work or furnishing materials.
So long as the property owner and general contractor meet the four requirements, Indiana courts will enforce no-lien clauses. Essentially, any subcontractor who enters in a no-lien agreement assumes the risk of nonpayment from the property owner or general contractor.
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Under Indiana mechanics lien law, property owners and “principle contractors” may include no-lien clauses which protect them from liability under a mechanics lien. However, as the court in Feitler noted, the no-lien agreement must:
- be in writing
- be acknowledged as provided in the case of deeds
- contain specific reference of the real estate to be improved
- filed and recorded in the recorder’s office of the county in which the property exists no more than five days after the contract has been executed.
So long as the property owner and general contractor meet the four requirements above, and the subcontractor did not sign the agreement as a result of fraud or duress, Indiana courts will enforce no-lien clauses.
If a No-Lien Clause is Enforceable, Can Unpaid Subcontractors Still Get Paid?
Under Indiana’s personal liability statute, the short answer is “yes.”
The court in R.T. Moore v. Slant/Fin, explained the difference between a mechanics lien and personal liability in the following manner:
“A subcontractor’s rights under the PLN [Personal Liability Notice] Statute are viewed as an additional or alternative remedy to the subcontractor’s rights under the Mechanics’ Lien Statute and to any other remedies the subcontractor may have against its contractor.”
In practice, the personal liability statute means that the property owner can be personally liable to any unpaid subcontractor if the general contractor does not pay the sub. However, recovery under the personal liability is limited to the amount that the property owner has not yet paid the general contractor.
Put differently, if the property owner has already paid the general the entire amount due, then that owner will not have to pay any unpaid subcontractors again. Additionally, similar to the required pre-lien notice, any unpaid subcontractor must also first send notice of personal liability.
In practice, the personal liability statute holds that the owner can be personally liable to any unpaid subcontractor if the general contractor does not pay the sub.
In Feitler, we still don’t know if the owner had or had not entirely paid off the general contractor, Cedar Creek Homes. All we know at this point in the case is that the lower court should not have dismissed the subcontractors’ personal liability claims before a trial was held.
We’ll keep you posted here as more developments emerge in this fascinating Indiana mechanics lien, no-lien clause, and personal liability case!