Oklahoma Case Illustrates Importance of Contract Reviews

The Supreme Court of Oklahoma recently determined a subcontractor's decision to waive its rights and claims does not automatically bar sub-subcontractors from filing a lien for unpaid invoices. In H2K Technologies, Inc. v. WSP USA, Inc., the Supreme Court reversed and remanded the trial court's decision for further proceedings.

"H2K was well within its rights to enforce a mechanic's lien," said Chris Ring, of NACM STS. "Basically, the Oklahoma Supreme Court did not rule in favor of H2K, rather they remanded the case back to the lower court and H2K will have to keep fighting in the lower court. But the good news is, they can fight."

The court only considered what effect, if any, a lien waiver clause in the original contractor has upon materialmen that were not parties to that contract and whether Oklahoma law prohibits such clauses from being placed in a construction contract.

This case reinforces the importance for material suppliers to review contracts closely on a project—especially if their contract incorporates another—prior to furnishing materials, said Connie Baker, CBA, director of operations for NACM STS.

"This comes down to 'incorporated by reference' or 'flow-down' clause interpretation," Ring said. "Techsas failed to incorporate or flow down into the H2K contract the lien waiver clause in the general contract."

Facts of the Case

The general contractor (GC), WSP USA, Inc., hired Techsas Inc. as a subcontractor on an oil refinery, Wynnewood Refining Co., LLC. Under its contract with the GC, Techsas waived its rights and claims on the project once materials were furnished and labor was completed. This contract also required Techsas to insert a similar waiver clause into its subcontracts. Techsas, however, failed to do so when it hired H2K Technologies to provide additional labor and materials. After paying two of three invoices, Techsas filed for bankruptcy protection. H2K sent the outstanding invoice to both Techsas and WSP. When Techsas failed to pay, H2K served a preliminary lien notice on Wynnewood, Techsas and WSP; two months later it filed a lien statement. WSP, as principal, and Fidelity and Deposit Company of Maryland, as surety, submitted a bond and held money in trust to cover the lien amount. WSP and Fidelity were named defendants and H2K dismissed Wynnewood. A trial court via judgement summary ruled in favor of the defendants as it determined although the Techsas contract was governed by New York law, which prohibits waiver clauses, contract provisions that subject a construction contract to the laws of another state are against public policy in Oklahoma. It also determined that because Techsas had waived its rights to all liens and claims, H2K could not "obtain any greater rights" than the subcontractor, Techsas, and therefore did not have a legal right to impress a lien on the property.

The Supreme Court, however, decided that the waiver of lien clause in the subcontractor's contract with the original contractor does not automatically flow down to the materialman, thereby waiving such materialman's statutory entitlement to file a mechanics' and materialman's lien.

"If a subcontractor agrees to give up its lien rights, it will only be able to recoup payment from who hired them," Baker said. "In a bankruptcy case like this, going against the property is the only way they will ever be paid. This case shows how important it is to read the contract and mark out what could hurt your company."

-Bryan Mason, editorial associate

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Sunday, 26 June 2022

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