Articles, Newsletters and Advisories
The Pennsylvania Mechanics’ Lien Law, 49 P.S. Section 1101 et seq. (the Lien Law), provides contractors a powerful legal hammer for the recovery of payment owed for work performed on a construction project; they can impose a lien against the property on which their work was performed, clouding the owner’s title, until payment is received. In December 2016, as a result of last year’s Act 142 (the act) amendments to the Lien Law, the Department of General Services launched the online State Construction Notices Directory (the directory). Prior to the creation of the directory, there was no streamlined system for owners and general contractors to track subcontractors and suppliers on a project site. Now, the directory provides greater certainty with respect to who may have lien rights, and helps owners and general contractors track work performed by subcontractors, sub-subcontractors and suppliers with whom they otherwise do not have a contractual relationship.
In light of the updates to the Lien Law, owners, general contractors, and subcontractors involved with the ever-increasing energy infrastructure projects within the commonwealth would be prudent to evaluate their business practices to ensure compliance with—and to take full advantage of their rights under–the amended Lien Law.
Applicability to Energy Infrastructure Construction Contracts
Although the case law in Pennsylvania is not completely settled, it appears from the text of the Lien Law, and the case law developed from it, that many well pad and pipeline construction projects are subject to the Lien Law. For example, a Pennsylvania appellate court held that a “well for the production of gas, oil or other volatile or mineral substance” falls within the definition of a “structure or other improvement” governed by the Lien Law, so long as the well involves “the erection or construction of a permanent improvement.” See Yellow Run Coal v. Yellow Run Energy , 420 A.2d 690, 692 (Pa. Super. Ct. 1980); compare with Stingray Pressure Pumping v. EQT Products, No. CV 16-279, (W.D. Pa. Dec. 21, 2016) (the mere furnishing of “labor, material, machinery and supplies … in connection with drilling and/or operation of the well” is insufficient to plead services “related to the ‘construction, erection, alteration or repair’ of a building or improvement under the Lien Law).
Additionally, lien rights can attach to subsequent “substantial additions” to an existing improvement (i.e., a previously constructed well pad or pipeline). Another Pennsylvania court held the addition of plastics-making machinery to a pre-existing plant was a “substantial” enough addition for the associated work to be covered by the Lien Law, as in Wendt & Sons v. New Hedstrom , 858 A.2d 631, 635 (Pa. Super. Ct. 2004). This suggests that activities like the installation of additional surface facilities or the erection of infrastructure necessary to tie a well into a pipeline are subject to the Lien Law.
Overview of the Notices Required by the Act
The amendments to the Lien Law created a structured notice procedure for owners and contractors on “searchable projects” (projects consisting of the construction, alteration or repair of an improvement costing at least $1.5 million). Specifically, the act permits four new types of filings within the Directory: notice of commencement; notice of furnishing; notice of completion; and notice of nonpayment.
A notice of commencement should be filed by the project owner or its agent before any labor, work or materials are furnished for the project and must contain, among other things, a “legal description” of the property, including the tax identification number of each parcel included in the project, and the “unique identifying number” assigned to the notice by the directory. The owner must post this notice on the project site, make reasonable efforts to ensure it remains posted during the project, and ensure the Notice is made part of the contract documents provided to all subcontractors. Contractors must include a provision in each of their subcontracts warning their subcontractors that the failure to file a notice of furnishing will forfeit the right to file a mechanics’ lien.
Similar to the structure of Ohio’s Lien Law, the act requires an owner (or an agent of the owner) to file a notice of commencement in order to trigger compliance with the act. Filing a notice of commencement ensures an owner receives notices from all subcontractors and suppliers performing work or furnishing materials on a project site. Unlike in Ohio, a notice of commencement is not “mandatory” under Pennsylvania law; failing to file one will not expose an owner to potential penalties under the Lien Law, but will only preclude an owner and its lender from tracking the subcontractors with potential lien rights on a given project, thus increasing the risk of “hidden liens” later coming to the surface. Failure to file a notice of commencement in Ohio could expose the owner to liability for a lien claimant’s actual costs and expenses incurred in gathering the information necessary to perfect a mechanics’ lien claim, and for all of its general contractor’s damages relating to a lien claim that could have been avoided had the notice been filed.
If an owner files a notice of commencement, first or second-tier subcontractors or suppliers must file a notice of furnishing within 45 days after first performing work or first providing materials on the job site to preserve their lien rights. Importantly, the filing of a notice of furnishing does not absolve a subcontractor of strictly complying with the remaining requirements and deadlines for prosecuting a lien claim that have always existed under the Lien Law.
The act also permits (but does not require) an owner to file a notice of completion within 45 days of the “actual completion” of work on the project, for informational purposes. Additionally, subcontractors are permitted (but not required) to file a notice of nonpayment when they have not received payment in full for work or materials provided.
Implications to Oil and Gas Projects
Given the minimal case law respecting lien rights on pipeline, well pad, or other oil and gas-related construction projects, there is still much unknown with respect to how the act will impact energy infrastructure projects. Nevertheless, based upon the new notice requirements and the lessons learned from other jurisdictions, all parties to a construction project should consider the following important principles.
Contractors and suppliers seeking to avail themselves of potential lien rights down the road should exercise particular caution when working on interstate projects. For example, where a pipeline construction project spans one or more states, the applicable statutory lien rights and requirements will change from one state to the next.
For owners of oil and gas projects, the greatest amount of confusion to arise from the act will likely relate to providing a “legal description” of the property in the notice of commencement, and complying with the act’s posting requirements. In the directory, many owners have merely provided a single address as the “legal description.” This approach may not be practical or feasible for a pipeline construction project, where numerous parcels, deeds and easement agreements or eminent domain condemnations constitute the “legal description” of the property. For these projects, owners might consider drafting a description of the property that includes the start and end points of the pipeline, and provide a complete list of counties within which the pipeline is located. Additionally, owners should carefully consider how to comply with the act’s requirement to “conspicuously post” a copy of the notice of commencement at the project site. Given the transient nature of a given work site on a pipeline construction project, owners may consider posting the notice of commencement in their office trailers and any trailers belonging to their contractors.
As for their contracts, owners should contractually require contractors (and their subcontractors) to include a provision in each of their subcontracts, and for any subsequent subcontracts entered, warning their subcontractors that the failure to file a notice of furnishing will forfeit the right to file a mechanics’ lien. Regardless of whether an owner utilizes the new Pennsylvania State Construction Notices Directory, it should always contractually protect itself from costs and fees associated with challenging or discharging any potential liens filed by subcontractors.
*Reprinted with permission from the 8/21/17 issue of The Legal Intelligencer. © 2016 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.
For the full article, click here.