By: Joseph M. Leone
A new opinion addressing mechanic’s liens was recently filed by the Court of Appeals of Indiana. In Service Steel Warehouse Co., v. United States Steel Corp., 2021 WL 1748068 (May 3, 2021), the Court held that an entity prefabricating structural steel components off-site was a subcontractor for purposes of the mechanic’s lien statute even though none of the physical work was performed at the project site. This is a departure from previous similar cases in Indiana which held that those performing work off-site and delivering prefabricated components to the project site (but not installing them) were deemed to be material suppliers under the mechanic’s lien statute. In Indiana, as in most states, a supplier to a contractor (whether general or sub) is entitled to a mechanic’s lien but a supplier to another supplier is not. Therefore, the determination of whether a prefabricator is a subcontractor or supplier is critical to whether their suppliers are entitled to a mechanic’s lien remedy or not.
In Service Steel, the prime contractor subcontracted fabrication of steel components for the project to a prefabricator, Troll Supply, who purchased most of the steel it used to prefabricate the structural components from Service Steel Warehouse Co. At the end of the project, Service Steel recorded a mechanic’s lien notice alleging that it had not been paid in full for the steel it provided to Troll Supply. Service Steel eventually filed suit against the property owner, U.S. Steel, to enforce its mechanic’s lien.
U.S. Steel argued that Troll Supply, the prefabricator, was a supplier and, therefore, Service Supply was a supplier to a supplier and was not entitled to a mechanic’s lien on its property. U.S. Steel pointed to previous holdings from the Court of Appeals of Indiana in City of Evansville v. Verplank Concrete & Supply, Inc., 400 N.E.2d 812, 818 (Ind. Ct. App. 1980) and Rudolph Hegener Co. v. Frost, 60 Ind. App. 108, 108 N.E. 16, 17 (Ind. Ct. App. 1915) addressing this same issue. Both the Verplank Concrete and Rudolph Hegener courts held that off-site fabrication (pre-stressed concrete beams in the former case and specially fabricated stairs in the latter) was not subcontracted work but instead was the supply of material.
The components fabricated by Troll Supply varied in size and complexity but some were as large as 130 feet long and weighed 260,000 lbs. Almost all of the steel provided by Service Steel was shipped to off-site fabrication facilities and not to the project site itself. The Court considered the prior holdings in Verplank Concrete and Rudolph Hegener but, declined to require on-site labor as a precondition to subcontractor status. The Court noted that the on-site labor requirement is the minority view and adopted the majority view as espoused in Vulcraft v. Midtown Bus. Park, Ltd., 110 N.M. 761, 800 P.2d 195 (1990) instead of the holdings in Verplank Concrete and Rudolph Hegener.
The Court acknowledged that the amount of work necessary for one to be deemed a contractor and not a supplier is greater for off-site prefabrication than for on-site work. The standard adopted by the majority view is that the labor component of the off-site work must be definite and substantial and the Court in Service Steel agreed that this should be the standard in Indiana as well. The Court quoted from Vulcraft v. Midtown Bus. Park, Ltd.:
To qualify as a subcontractor, the party must perform some portion of the work for which the owner originally contracted. It is not necessary that the work be done at the construction site, but work must be performed to the contract’s plans and specifications. The work can be performed on material supplied to another subcontractor of the contractor, but the material cannot be generic, stock, off-the-shelf items or items generally available without modification—it must be fabricated uniquely or specially by the contractor for the requirements of the particular project.
Vulcraft v. Midtown Bus. Park, Ltd., 110 N.M. 761, 800 P.2d 195 (1990) at 200-01.
Thus the “definiteness” portion of the requirement contemplates that the fabricated products are unique for the project. With respect to the “substantiality” requirement the Court stated:
To qualify as a subcontractor, the work performed must be substantial. “[A] relatively small expenditure of labor in relation to a contract mainly for material” is not sufficient. [Vulcraft v. Midtown Bus. Park, Ltd.]. However, we do not adopt a mechanical test based on a percentage of the total contract performed. See generally [Vulcraft v. Midtown Bus. Park, Ltd.], at 201 n.4. “Substantiality is determined based on evaluating the amount of labor and skill provided in relation to the material supplied and the importance of the contribution to the project.” [Vulcraft v. Midtown Bus. Park, Ltd.].
Service Steel Warehouse Co., v. United States Steel Corp. at 5.
The Court noted that the substantiality requirement satisfies the remedial purpose of the mechanic’s lien remedy with the owner’s risk of a mechanic’s lien from an unknown material supplier. A prefabricator who performs substantial off-site labor for products specifically fabricated for a construction project would be known to the project owner. The project owner will, therefore, be able to manage the risk of non-payment to the prefabricator’s suppliers which could result in a mechanic’s lien against the owner’s property.
The majority view is also in line with the developing nature of the construction industry. The Court specifically noted in its opinion that off-site construction is increasingly being used in the industry. The only standard form contract document for off-site prefabrication is the ConsensusDocs 753 Standard Prefabricated Construction Contract which was just released in 2020. The ConsensusDocs 753 specifically identifies the prefabricator as a subcontractor and includes terms which address the unique relationship between a prime constructor and prefabricator. Those terms resemble a constructor-subcontractor relationship much more than a material supply agreement, hence, the delineation of the prefabricator as a subcontractor.
It is important for project owners and prime constructors to have good systems in place to identify suppliers to prefabricators and obtain lien waivers necessary to protect them against a mechanic’s lien recorded by one of those remote suppliers. As is true with most risk management on construction projects, good project administration is paramount.
For questions about mechanic’s liens, contact Joseph Leone at email@example.com or your DSV attorney.
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