The Full Payment Of Contract Price Defense

By: James C. Busch

In recent months, an increasingly large number of defense attorneys have begun to assert payment of the contract price as a defense to lien filings. This defense is one of the most complex and misunderstood lien defenses.

O.C.G.A. 44-14-361.1(e) states “In no event shall the aggregate amount of lines set up by Code Section 44-14-361 exceed the contract price of the improvements made or services performed.” Many defense attorneys have interpreted this section to simply mean if the property owner has paid the contract price to the general contractor then no liens may be filed on the property in question.

An owner may use the full payment defense against those with whom he has no contractual relationship if the owner can show (1) the full contract price was paid to the contractor, and an affidavit was received from the contractor that the agreed or reasonable value of all labor and materials has been paid; or (2) the contractor was paid the full contract price and expended the sum paid by the owner to pay for labor and materials; or (3) the contractor was paid the full contract price at a time when no liens were outstanding or when no valid preliminary notices or claim of lien had been filed; or (4) the contractor abandoned the work and the sums paid the contractor and others employed by the owner to complete the work equaled or exceeded the contract price.

The above major points of this defense are where most defense attorneys stop their research and claim the defense. However, the major points outlined above are further complicated by an additional set of requirements which have been established by case law.

For example, with respect to point number 1, an owner who pays the contractor the full contract price but fails to obtain a valid contractor’s affidavit and who has not seen to it that the payments made to the contractor were properly applied to subcontractors and materialmen has no standing to argue this defense. Few property owners know what a valid contractor’s affidavit is, let alone that they should require one or that they should verify that the contractor properly applied the funds. Thus, to use this defense, a property owner must obtain a valid contractor’s affidavit or verify that all payments were properly allocated.

It is also important to note that the relationship between the property owner and contractor is very important. The payment in full defense applies only to the property owner whose contractor is an independent contractor. When a contractor is acting as an agent for the owner, lien claimants will not be affected by this defense irrespective of the amounts paid to the contractor.

In addition, the owner must show the full contract price has actually been paid. Full payment of the contract price after a lien has been filed acts as a defense only when the owner shows that the sums paid were properly appropriated. Properly appropriated funds is an area that further complicates the owner’s payment in full defense.

Properly appropriated funds means that if a materialmen’s claim of lien has previously been filed, payment that is thereafter made to any other materialmen as a potential lien claimant is not payment which is properly appropriated and may not be set up as a defense. If a claim of lien has been filed and recorded, then the owner must see that such materialmen or laborer is satisfied out of the money paid by the owner to the contractor or the owner will be held liable for the amount of the lien.

The most typical situation where this defense is raised is when the original contractor has abandoned the job and the second contractor completes the project over budget. In this scenario, the original contractor will not have provided an affidavit and the property owner will have no idea how funds were applied. In this situation, the property owner will likely have to pay twice for portions of the project.

The lien claimant that is active in communicating with its customers will be better able to determine when a contractor is getting in trouble. It is when the contractor is first getting in trouble that lien claimants must make critical decisions such as: Do I lien the contractor and possibly further damage the situation or do I wait to help the contractor and, thereby, jeopardize my lien rights?

There are no easy answers, but lien claimants must make a case by case evaluation and determine what they feel is the most appropriate action. However, the earlier a claimant files its lien, the better position that claimant is going to be in barring a foreclosure on the property.

Mr. Busch is an attorney specializing in commercial and construction litigation for Busch, Reed, Jones & Leeper, P.C. in Marietta, Georgia