By Bruce Jervis
Prime contractors have cause for concern that their subcontractors are paying lower-tier subcontractors and suppliers. Unpaid parties at the bottom of the chain can create a multitude of problems, including mechanic’s liens, payment bond claims and risk of double payment by the contractor. But, in the absence of a statutory mandate, should contractors have a duty to protect the payment rights of lower-tier parties?
The Alaska Supreme Court recently answered this question in the negative. The contractor waived a payment bond requirement in a subcontract after the sub had trouble obtaining bonding. Instead, the contractor retained 15% of the subcontract price until all lower-tier parties had been paid. However, the contractor released the full subcontract balance, leaving a lower-tier subcontractor unpaid. It was held that the contractor had no independent duty to protect the lower-tier sub’s payment rights.
What do you think? Self-interest makes full payment of lower-tier parties important for prime contractors. But should contractors have a duty to protect those payment rights? The Alaska court said lower-tier parties can look out for themselves under the terms of their contracts. Contractors have no independent duty to protect the economic interests of parties with whom they have no contract. Your comments are welcomed.