Payment Disputes Between Builders and Material Suppliers Can Cause Problems with Homeowners

Nearly all contractors buy job materials from a material supplier. When the material supplier provides the correct materials, and the contractor pays for them, few problems arise. It doesn’t always work out that way, however. What if the supplier orders the wrong material but refuses to acknowledge the mistake and demands full payment from the contractor? What if the supplier delivers the correct material and the contractor refuses to pay for it? Situations like these are not uncommon. If the dispute stays between contractor and supplier, the matter can usually be resolved between those parties. Additional problems and considerations are brought into the mix, however, when the homeowner becomes involved through the use of mechanic lien rights.

In one common scenario, a dispute arises between the contractor and supplier regarding the proper amount owed for materials. The supplier argues that $10,000 is owed on the account, while the contractor claims he or she only owes $5,000 because some of the materials were defective or not ordered to specifications. No payments are made while the dispute is pending. In this example, the homeowner has fully paid the contractor for the work. If the supplier has properly protected its mechanic lien rights by giving pre-lien notice and filing a mechanic’s lien statement, the supplier can exert considerable leverage on the contractor by commencing a mechanic’s lien foreclosure action against the homeowner.

Since the homeowner has already paid for the work, they will be understandably upset at the prospect of paying for the materials twice. A material supplier can pursue a mechanic’s lien regardless of whether the homeowner paid the contractor. Obviously, this reflects poorly on the contractor because it tells the customer that the contractor accepted payment from the homeowner and then refused to pay the supplier. The fact that there is a legitimate dispute over the amount owed to the supplier is of little consolation to the homeowner. The homeowner simply wants the property free and clear of any liens and will expect the contractor and supplier to work out the dispute.

Most contractors want to remove the homeowner from this type of situation whenever possible. One way to resolve the problem is simply to settle the claim with the supplier. This is the easiest solution so long as both parties are reasonable in the negotiations to resolve the dispute. Doing so eliminates any need to pursue mechanic lien rights against a homeowner, and everyone walks away reasonably satisfied.

When a settlement isn’t possible, however, there is another option that keeps the homeowner out of the dispute. If a supplier liens a homeowner’s property, the contractor has the option to deposit money with the Court to satisfy the lien. Minn. Stat. § 514.10 provides a formula that is used to calculate how much money must be deposited to release the lien. Typically, the deposit includes the amount of the lien plus additional monies for payment of interest and attorney fees. If that sum is deposited with the Court, the lien is released and the homeowner has nothing to worry about. The deposited money is held by the Court until the contractor and supplier either settle the case or have it decided by the Court. Any leftover money that is not awarded to the supplier is returned to the contractor.

Resolving the dispute in this manner has several advantages to the contractor. First, it sends a positive message to the customer that you recognize that they should not be involved in the dispute, and that you take responsibility for resolving the matter. Second, it eliminates any leverage the supplier may get by threatening to drag the homeowner into the dispute. Third, by removing the homeowner from the matter, it substantially reduces the chances that the homeowner will make a complaint with the contractor licensing authorities - now the Minnesota Department of Labor and Industry. Proceeding in this fashion keeps the dispute between the right parties - contractor and supplier. When a routine settlement is not possible, this is a good way to streamline the dispute resolution process and protect the innocent homeowner.

Ben Bohnsack is an associate attorney with Rinke-Noonan and practices in the areas of construction litigation, employment litigation and general civil litigation.