Articles Posted in Contract Law

Zombie ApocalypseI am a fan of the radio show, A Way with Words.  Over the weekend, I ran across a clip on their website discussing an experiment run by a company in London to demonstrate the risks of using public WiFi.  The company set up a hotspot that offered free service to anyone who accepted a user agreement.  Buried in the agreement was what the company calls a “Herod Clause,” a promise by the user to assign his or her first-born child to the company for all eternity. Six people accepted the agreement.  Presumably those people fell into one of three categories:

  1. People with no children and no intention of ever having any children.
  2. Lawyers who knew that the clause would be unenforceable.

Gavel and Hourglass
A couple of years ago the Indiana Business Law Blog posted an article about two different Indiana statutes of limitations for breach of contract:

  • A six-year statute of limitations at Ind. Code § 34‑11‑2‑9, which applies to “promissory notes, bills of exchange, or other written contracts for the payment of money”
  • A ten-year statute of limitations at Ind. Code § 34‑11‑2‑11, which applies to “contracts in writing other than those for the payment of money”

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This one of a series of six posts regarding mechanics’ liens:

Part 1. The basics of credit risk and subcontracting.

Part 2. Reallocating risk in construction projects.

Part 3. Acquiring a lien.

Part 4. Enforcing a lien.

Part 5. Personal liability notices.

Part 6. No-lien agreements.

The last post in our series on mechanics’ liens addresses a situation in which mechanics’ liens are not available. For certain types of projects, the Indiana Mechanic’s Lien Statute permits the owner and principal contactor to enter into an agreement or stipulation that prohibits liens that arise from a particular contract.

There are essentially two categories of projects that are eligible for no-lien agreements. The first category includes “class 2 structures” (as defined at Indiana Code section 22-12-1-5), which encompasses single- and double-unit residential structures and some related projects. The second encompasses construction owned by certain types of utilities, including public utilities, municipal utilities, and rural membership utilities. The details of the projects that are eligible for no-lien agreements can be found at Indiana Code 32-28-3-1(3).

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[Note: This one of a series of six posts regarding mechanics’ liens:

Part 1. The basics of credit risk and subcontracting.

Part 2. Reallocating risk in construction projects.

Part 3. Acquiring a lien.

Part 4. Enforcing a lien.

Part 5. Personal liability notices.

Part 6. No-lien agreements.]

We’ve been examining the role of mechanics’ liens in construction contacts, including the way they reallocate credit risk among contractors and the owner of a construction project. The Indiana Mechanics’ Lien Statute includes another remedy for subcontractors who do not get paid, entirely apart from a mechanic’s lien against the real property where the construction takes place. The statute does not give a name to the remedy, but it’s often called a personal liability notice or PLN.

To see how it works, let’s go back to the hypothetical example of our last article. Assume you are a subcontractor with a $15,000 claim against the general contractor, a claim the GC disputes. Now let’s assume that the deadline for filing a sworn statement and notice of intention to hold a mechanic’s lien has already slipped by. Are you out of luck?

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[Note: This one of a series of six posts regarding mechanics’ liens:

Part 1. The basics of credit risk and subcontracting.

Part 2. Reallocating risk in construction projects.

Part 3. Acquiring a lien.

Part 4. Enforcing a lien.

Part 5. Personal liability notices.

Part 6. No-lien agreements.]

So far we’ve looked at the basics of subcontracting and allocation of credit risk, how a mechanic’s lien changes things by reallocating credit risk, and how a contractor, subcontractor, supplier, or worker goes about acquiring a mechanic’s lien. Now we’ll discuss how to enforce a lien once you have it. Assume you are a subcontractor with a claim against the general contractor, or GC, for $15,000. The GC has withheld that amount from your fees, accusing you of not finishing your work on schedule. The general contractor says it incurred $15,000 in additional labor charges because its workers had to wait around with nothing else to do until your work was completed. You blame the general contractor for the delay and additional expense, and you have recorded a sworn statement and notice of intention to hold a mechanic’s lien in the amount of $15,000. A copy of it has been sent to the owner.

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[Note: This one of a series of six posts regarding mechanics’ liens:

Part 1. The basics of credit risk and subcontracting.

Part 2. Reallocating risk in construction projects.

Part 3. Acquiring a lien.

Part 4. Enforcing a lien.

Part 5. Personal liability notices.

Part 6. No-lien agreements.]

In the first article in this series, we discussed the basics of credit risks associated with subcontracting in an area other than construction. In the second, we examined how a mechanic’s lien reallocates those credit risks for construction contracts. In this one, we explain how a contractor or subcontactor goes about acquiring a mechanic’s lien. For a change of pace, we’ll do it in a question-and-answer format.

Some caveats: First, mechanic’s lien requirement vary significantly from state to state. Given that this is the Indiana Business Law Blog, we’ll answer the questions based on Indiana law. Also note that the Indiana Mechanic’s Lien Statute is filled with complicated, cumbersome, even archaic language that can be difficult for even lawyers to parse, so we’ll try to give answers that are more easily understood. However, that also means we may leave out some details, making the answers a bit imprecise in some circumstances. As always, this blog is not legal advice and you should not rely on it as a substitute for legal advice.

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[Note: This one of a series of six posts regarding mechanics’ liens:

Part 1. The basics of credit risk and subcontracting.

Part 2. Reallocating risk in construction projects.

Part 3. Acquiring a lien.

Part 4. Enforcing a lien.

Part 5. Personal liability notices.

Part 6. No-lien agreements.]

In part 1 of this series, we discussed a hypothetical situation with a company that hired an ad agency, with the ad agency subcontracting some work to a production company and purchasing advertising time on a television station. The production company bore the ad agency’s credit risk because its contract was with the ad agency, and when the ad agency went out of business the production company faced the possibility of not being paid. In contrast, the television station did not bear the ad agency’s credit risk because its contract with directly with the ad agency’s client. The ad agency’s client faced the possibility of having to pay for the television air time twice – once to the ad agency and a second time directly to the television station when the ad agency failed to pay for the air time on the client’s behalf.

Now let’s look at the credit risks associated with a construction project in which the owner of a construction project hires a general contractor to complete the entire project on a time-and-materials basis, which means that the price paid by the owner is equal to the amount the general contractor pays for the labor (i.e., the “time”) and materials required to do the construction, plus a markup to cover overhead and profit. The general contractor does some of the work with its own employees and subcontracts some of the work, including the installation of the electrical wiring, to another contractor.

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[Note: This one of a series of six posts regarding mechanics’ liens:

Part 1. The basics of credit risk and subcontracting.

Part 2. Reallocating risk in construction projects.

Part 3. Acquiring a lien.

Part 4. Enforcing a lien.

Part 5. Personal liability notices.

Part 6. No-lien agreements.]

This starts a short series of blog articles discussing mechanics’ liens and their cousins, notices of personal liability, concepts that arise in the context of construction contracts and similar agreements. To understand what’s special about construction contracts, you need to understand a bit about how contract law, subcontracting, and credit risk work in other settings. So let’s review the basics.

Imagine your company signs an advertising agency agreement, hiring the ad agency to create a television advertising campaign for your business. The ad agency comes up with the ideas for the commercials, hires a production company to produce them, and purchases advertising time on your behalf from local television stations. The contract to produce the commercial is between the ad agency and the production company, but the contract with the television station is between the television station and your company, signed by the ad agency as your company’s agent, as it is authorized to do by the ad agency agreement.

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iStock_000007946595Small.jpgOn December 12, 2008, Layne and Anita Dellamuth bought flooring materials and installation services from Carpets Unlimited. The Dellamuths made a downpayment that left a balance of a little more than $23,000. Carpets Unlimited subcontracted the installation services to Jared Keeton, who performed that work later the same month, but apparently not to the liking of the Dellamuths because a dispute arose between them and Keeton about the quality of the installation. In addition, the Dellamuths objected to additional charges that Keeton added to the amount owed. In February 2009 Carpets Unlimited corrected the work at no additional cost to the Dellamuths.

By August 2011 the Dellamuths still had not paid Carpets Unlimited the remaining $23,000. Carpets Unlimited sent the Dellamuths a letter and invoice, demanding payment, by certified mail, which the Dellamuths signed for on August 27. Another letter and invoice, sent on June 26, 2012, was returned unclaimed. In August the same year, Carpets Unlimited sued the Dellamuths, and the trial court granted Carpets Unlimited’s motion for summary judgment. The Dellamuths appealed, and today the Indiana Court of Appeals affirmed the trial court’s decision.

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iStock_000025338621Small.jpgI remember a story told by a business owner who had been involved in the negotiation of a very complicated contract, with both sides represented by high-priced lawyers. In one particularly brutal negotiating session, the lawyers argued at length about a particular provision, with one side saying it should be a warranty and the other side saying it should be a covenant. At long last, they reached some sort of agreement, and everyone took a break for dinner. The business owner related that, as he rode down the elevator with his lawyer, he asked, “What’s the difference between a covenant and a warranty?” The answer: “Not much.” And that is not too far from the truth. But it would be a very different story if the question had been, “What is the difference between a covenant and a condition?”

The importance of the distinction between a covenant and a condition was driven home by a 2010 decision from the Ninth Circuit Court of Appeals. The decision received a great deal of attention at the time, and I used it as an assignment in the law school class I was teaching on contract drafting. Even though the decision has been thoroughly discussed from every angle, it still serves as a useful reminder to lawyers not to be careless with license agreements and to pay particularly close attention when drafting conditions.

The case was MDY Industries v. Blizzard Entertainment, and it dealt with a license agreement for the popular online role-playing game, World of Warcraft, or WoW. The license agreement prohibited the licensee from using bots to simulate people playing WoW. There was no question that the licensee had violated that term of the agreement. The question was whether the provision was a covenant or a condition.

A covenant is a promise by a party to a contract to do something or not to do something. If the promise is broken, the breaching party is liable to the other party for monetary damages — usually the amount of money required to put the non-breaching party in the same situation it would have occupied if the covenant had not been broken.

In contrast, a condition is a fact that must exist (or not exist) before another substantive provision of a contract takes effect. In the context of a license agreement, the other substantive provision is the license itself. If the conditions to a license are not satisfied, the license is void. And if the license is void, the breaching party will probably be liable for infringement of the underlying intellectual property — in this case, the copyright to the software.

So the question before the Ninth Circuit was whether the crucial contract provision was a promise by the licensee not to use bots or a condition on the grant of the license itself. If the former, the licensee would be liable for monetary damages, which would amount to relatively little. However, if the prohibition on using bots was a condition to the license, the licensee would be liable for copyright infringement, including statutory damages that could greatly exceed the damages owed for breach of contract.

In analyzing the provision, the Ninth Circuit noted that the folowing language was under a heading, “Limitations on Your Use of the Service.”

You agree that you will not . . . create or use cheats, bots, “mods,” and/or hacks, or any other third-party software designed to modify the World of Warcraft experience . . .

First the court disregarded the heading, using the common rule of contract interpretation that headings are for convenience only and are not part of the actual language of the contract. Once that was done, the court noted that there was nothing else about the language to connect the prohibition on bots to the scope of the license or the effectiveness of the grant of the license. Instead, the provision was written merely as an ordinary agreement, or a promise. If the copyright owner’s real intent when the license agreement was drafted was to restrict the scope of the license, it could easily have done so by designating the prohibition as a condition to the license. The resolution of the case, or at least part of the case, turned on that subtle, technical drafting issue.

So if you are ever in a contract negotiation and your lawyer is arguing with the other side that a provision should be a covenant instead of a warranty, or vice versa, you might want to take a break and, outside the negotiating room, ask your lawyer if it is really worth the time to argue about it. However, if your lawyer is arguing with the other lawyer about a covenant versus a condition, you can be fairly certain it really is worth the time.
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