A Guide to South Carolina
Construction
Law For Trade Contractors and
Suppliers
I. Introduction
Construction subcontractors and material suppliers have
many common legal problems by virtue of the fact that they lack a direct
contractual relationship with the project owner who directs the
construction and controls the funds. In South Carolina, these unique
problems are directly affected by certain laws, regulations, and
practices. The purpose of this outline is to make the
subcontractor/supplier doing business in South Carolina more aware of
those peculiarities, inherent in sate law and practice, which directly
affect their businesses.
II. Licensing of Construction Contractors (S.C.
Code 40-11-10 et seq.)
By virtue of the Restructuring Act of 1993, the
Contractors Licensing Board is now an agency of the Department of Labor,
Licensing, and Regulation. (LLR)
All contractors must be licensed prior to bidding and/or
contracting directly with owners when the cost of the undertaking exceeds
five thousand ($5,000.00) dollars. Most are licensed as general
contractors under the classifications of "building",
"highway", "public utility", and
"specialty". Within these classification are numerous
sub-classifications based upon the scope of the work to be performed.
Generally a specialty contractor needs no license while
working as a subcontractor to a licensed general contractor. But
there is a separate licensing classification for mechanical
contractors. Mechanical contracting licenses fall under the
following sub-classifications: air conditioning, heating, packaged
equipment, electrical, lighting protection systems, plumbing process
piping, and refrigeration. All mechanical contractors must be
licensed when performing work as either a prime or subcontractor when the
cost of the undertaking exceeds five thousand ($5,000.00) dollars.
In addition, certain specialty sub-classifications must be separately
licensed. Examples are: bridges, specialty roofing, asphalt paving,
and marine.
Under separate licensing statutes also administered by the
Contractors Licensing Board, the following specialty contractors are
required to be licensed: fire sprinkler installers and alarm systems
businesses. A licensed electrical contractor is allowed to bid and
install burglar and fire alarm systems without a separate license.
Home Builders can be licensed either as Residential Home
Builders or as general contractors. Pursuant to the Residential
Specialty Contractors Act, all specialty trade contractors working on
residential construction must register with the Board of Residential
Builders. (LLR)
A contractor in South Carolina may not bid on work for
which a license is required with the intention of obtaining that license
prior to commencing work. The South Carolina Licensing Law makes it
a misdemeanor for an unlicensed contractor to bid on work for which a
license is required.
III. Mechanic's Liens (S.C. Code 29-5-10, et
seq.)
A contractor/subcontractor/supplier may file a mechanic's
lien prior to 90 days following the last furnishing of labor or
materials. The lien attached to the owner's interest in the land,
but it value is limited to the amount actually owed by the owner on the
construction contract. Within 180 days after the last furnishing, a
suit must be brought to enforce the lien, or it will dissolve.
Once the owner receives written notice of the claim of a
subcontractor or supplier, he pays the general contractor at his own
risk. If the owner pays the general contractor after receiving
written notice, and the subcontractor/supplier then perfects his
mechanic's lien by bringing suit within the time prescribed, the owner
will not be able to offset the amounts paid to the general contractor
after notice.
If the owner has specifically authorized the work of the
subcontractor (or materials supplied), he is liable to the full extent of
the lien regardless of whether the general contractor has been paid.
Even prior to the lien filing, a second-tier (or lower)
subcontractor or supplier can significantly strengthen his lien rights by
serving upon the general contractor a "Notice of Furnishing of Labor
or Materials" reflecting certain detailed information required by the
statute. This filing is not necessary unless the general contractor
has filed a notice of project commencement as prescribed in the
statute. If the contractor has filed a notice of project
commencement and the remote provider has not sent a notice of furnishing,
the lien rights of the remote provider do not tie into the amount owed to
the general contractor by the owner, but are limited to the amount owed by
the general to the subcontractor in privity with the remote provider.
Mechanic's liens are subordinate to prior-filed mortgages,
but prevail over subsequent advances made by the lender after the liens
are filed if the lender has actually been served with the lien.
There is no priority among perfected mechanic's lienors: they share
pro-rata if the amount recovered is less than the aggregate of the liens.
The "prevailing party" in a mechanic's lien
enforcement action may recover attorney's fees in an amount prescribed by
the court.
No lien waiver which has not been substantially paid for
is enforceable in South Carolina.
IV. LIENS OF SUBCONTRACTORS AND SUPPLIERS ON
CONTRACT PRICE
Money paid to a prime contractor on account of the
materials and services of subcontractors and suppliers is impressed with a
first lien in favor of those subcontractors and suppliers. It is
unlawful for the prime contractor to use such funds other than to pay the
suppliers and subcontractors. A prime contractor may not withhold
funds from a subcontractor on one project for alleged deficiencies on
another project. Diversion of money from a construction job is
punishable by fine and imprisonment. It may also give rise to a
civil claim for triple damages un the S.C. Unfair Trade Practices Act.
V. PAYMENT BONDS REQUIRED ON STATE WORK (S.C.
CODE 11-35-3030(2))
A prime contractor on state construction must provide a
payment bond for the protection of first and second-tier subcontractors
and suppliers. Suit on such bond may be brought directly against the
surety in the county or circuit where the contract was to be
performed. A second-tier subcontractor or supplier must notify the
prime contractor by certified mail within 90 days of the last furnishing
of labor or materials. Any suite on the bond must be brought within
a year of such furnishing.
VI. BID LISTING ON STATE WORK
(S.C. Code 11-35-3020(2)(b))
A prime contractor on state work is required to list each
subcontractor who will perform work of a value over three percent of the
estimated cost of construction as determined by the project
architect/ The contracting agency will identify by specialty, in the
bid documents, the subcontractors required to be listed.
Failure to follow the bid-listing procedure renders a bid
subject to attack under the bid protest provisions of the Procurement
Code.
VII. LIMITATION OF RETENTION ON STATE WORK
(S.C. Code 11-35-3030(4))
Retention on state work is limited to 5% and must be
released on a line-item basis. A prime contractor must pass such
retention on to his subcontractors.
VIII. INTEREST/FEES IF CLAIM UNREASONABLY DENIED
(S.C. Code 27-1-15)
A contractor or supplier who places by certified mail a
claim for payment for services or materials incorporated into the work,
may recover interest and attorney's fees if the claim is not properly
investigated, and, if valid, paid within 45 days of the demand.
IX. THE SOUTH CAROLINA PROMPT PAY ACT
(S.C. Code 29-6-10 et seq.)
This law requires prompt payment to contractors,
subcontractors and suppliers, and provides for interest penalties when
payment is delayed. The general contractor must pay the
subcontractor within seven days from the time the general contractor
receives payment from the owner. The subcontractor must, in turn,
make such payment to sub-subcontractors and suppliers within seven days of
receipt by the subcontractor of those funds.
In order to take advantage of the protection provided by
the Prompt Pay Act, the subcontractor or supplier must put a written
notice in each pay application or invoice. The notice should read
substantially as follows: "South Carolina law requires prompt
payment to subcontractors and suppliers, and provides interest penalties
for late payment."
X. THE SUBCONTRACTOR'S PAYMENT PROTECTION ACT (S.C.
Code 29-6-20)
This law protects the payment rights of subcontractors and
suppliers by making pay if paid (contingent payment) provisions
unenforceable, requiring payment bonds on all public work, and prohibiting
the issuance of payment bonds by entities other than licensed insurance
companies meeting certain criteria.
XI. PAYMENT BOND RIGHTS OF REMOTE CLAIMANTS
(S.C. Code 11-1-120 et seq.)
This law, passed in 2000, restricts the rights of remote
claimants to recover against payment bonds, in the same manner that their
rights were restricted with regard to recovery on mechanic's lien
actions. Essentially, in order to trigger this statute, the general
contractor must file a notice of commencement. Once such notice is
filed, a supplier to a subcontractor or other remote provider (no privity
with the general contractor) must send a notice of furnishing to the
general contractor by certified mail. There is no deadline for the
sending of this notice, but until it is received, any payments made by the
general contractor for the materials/services which are the subject of the
claim, will discharge - to the extent of such payment - the bond rights of
the remote provider.
XII. CONTRACTS TRANSPORTING DISPUTES
(S.C. Code 15-48-10 et seq.)
Many of the subcontract forms commonly used in South
Carolina by out-of-state general contractors require that the
subcontractor go back tot he general contractor's home state to resolve a
dispute. Under the above statute, such clauses are no longer
enforceable, and subcontractors and suppliers may sue or seek arbitration
as otherwise provided by South Carolina law and the Rules of
Arbitration. (NOTE: As far as the arbitration prong of the statute
is concerned, several trial court decisions have held the statute
impermissibly conflicts with the Federal Arbitration Act.)
XIII. ARBITRATION IN SOUTH CAROLINA
(S.C. Code 15-48-10 et seq.)
South Carolina has adopted the Uniform Arbitration Act,
which makes arbitration agreements valid and enforceable. In order
for an arbitration to be enforceable under the South Carolina Arbitration
Act, conspicuous front-page notice of the arbitration provision is
required. If such notice is not given, however, and if the project
affects interstate commerce, arbitration may be enforceable under
the Federal Arbitration Act, which does not requite a stamp.
("A Guide to South Carolina
Construction Law" was prepared as a service to the industry by Daniel
T., Brailsford, Esq., a member of the Columbia, South Carolina law firm of
Robinson, McFadden and Moore PC. Mr. Brailsford has been active in
construction law since the mid 70's, representing primarily the interests
of suppliers and subcontractors. He is a member of the
"Subcontractors, Materialmen, and Equipment Systems"
subcommittee of the ABA Forum on Construction. He is General Counsel
to the MCASC and the American Subcontractors Association of the
Carolinas. He has presented programs on legal rights of
subcontractors and suppliers to several national symposiums, the South
Carolina Bar, and numerous specialty contractor trade associations.
Mr. Brailsford has been a construction arbitrator since 1978 and completed
mediation training at Duke University. He now serves as a
construction arbitrator and mediator as part of his practice, and ahs
written and lectured on alternative approaches to the resolution of
construction disputes.)
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