Weather-Tite - A Lesson For Owners Regarding Payments
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Those of you follow our blog know that we've been waiting for the Illinois Supreme Court's Weather-Tite decision for quite some time. The facts of Weather-Tite were undisputed. The University hired a general contractor who hired subs for the renovation of a residence hall. On five different occasions, the general contractor submitted sworn statements in accordance with the Illinois Mechanics Lien Act to the University requesting payment.
After receiving monies for each of the first four sworn statements, the University paid the general contractor the amount listed on each statement. For the last statement, the University paid the money to the general contractor but the bank where the funds were deposited exercised a right of set-off and took the money from the account of the general contractor before the subcontractors were paid the amounts reflected in the general contractor's last sworn statement.
Several of the subcontractors including Excel filed mechanics lien claims against the University for payment. The University was awarded summary judgment on the Excel claim in the trial court, following a determination that Excel did not have a valid lien pursuant to Section 5 of the Mechanic's Lien Act, the appellate court reversed and the decision was appealed to the Illinois Supreme Court.
In the Supreme Court, the University argued that section 5 of the Mechanics Lien Act only required it to pay the amount listed on the general contractor's sworn statement to the University. Excel argued that under section 5, and in conjunction with other sections of the Act, the university was required to withhold the amounts listed on the general contractor's sworn statement shown due to Excel.
The Illinois Supreme Court has agreed with arguments contrary to those of the University advanced by Excel and the opinion is informative to anyone working on a construction project. The Illinois Supreme Court has ruled that Section 5, read in conjunction with sections 27 and 32 of the Illinois Mechanics Lien Act, requires that any owner receiving a contractor's sworn statement withhold the funds noted on the statement for payment directly to the subcontractor(s). Failure to withhold the funds subjects the owner to the possibility of a mechanics lien against its property if payments are made to the contractor and the contractor in turn fails to pay the subcontractor. The opinion is not only well written, it is extremely informative and delineates certain guidelines a party should follow when paying for work.
As delineated by the court, it was the intent of the Illinois legislature that there be an orderly method for conducting construction transactions to protect subcontractor claims: (1) The owner and general contractor enter into a contract for the construction work; (2) as the work is completed, the general contractor submits a section 5 sworn affidavit that must list all subcontractors and the amount due, or to become due, or advanced; (3) when the section 5 sworn affidavit lists an amount due or to become due a subcontractor, section 24 requires the owner retain sufficient funds to pay the subcontractor; and (4) section 27 requires the owner to make subcontractor payments upon receiving notice of a subcontractor claim pursuant to a section 5 sworn statement. To protect itself an owner can require a lien waiver be provided by a contractor when the subcontractor is paid and the owner can require a lien waiver by every subcontractor when paying the contractor.
In supporting its opinion, the court looked to the Knickerbocker decision of 1914 in the Luczak Brothers decision of 1983.
The Weather-Tite opinion represents sound guidance that the general contractor's sworn statement provides the owner notice of subcontractor claims and imposes a duty on the owner to retain funds sufficient to pay those subcontractor claims. Owners should be aware that if the contractor's sworn statement shows monies owed to the subcontractor the owner should withhold those funds for payment directly to the subcontractor or wait to release those funds until a waiver is provided.
The delineation of construction project payment procedures along with a sound interpretation of section 5 and the requirements given to owners should provide a decent path for anyone to follow regarding when payments can be made to a contractor and what should be requested of the contractor when the owner believes that there may be subcontractors on the project. For subcontractors, in order to avoid an owner's claim that it had no knowledge that a subcontractor was performing on the project, the subcontractor's 60 day notice of performing work on the project should probably be sent at the beginning of the project. Once all parties have knowledge of who is working on the project and who is responsible for payment, the current problem of the possibility of a contractor failing to pay the subcontractors and liens being placed on the premises or the possibility of a contractor going bankrupt before subcontractors are paid funds advanced by the owner can ultimately be lessened or done away with entirely.
