Pre-claim Notices: A Pitfall for the Unwary

When a subcontractor becomes insolvent, the ability of its suppliers and sub-subcontractors to get paid may depend on compliance with statutory pre-claim notice requirements.  Washington law provides that suppliers and sub-subcontractors who have furnished materials or equipment to a subcontractor cannot assert a lien claim against the general contractor on a private project unless they have given a timely pre-claim notice. The form of the notice is set forth in RCW 60.04.031.

A claimant’s failure to send the required notice will give the general a valid defense to a lien foreclosure action to collect payment for materials or equipment furnished to the insolvent subcontractor.  If a subcontractor becomes insolvent, a general contractor should not issue joint check payments to a lower tier supplier or sub-subcontractor until the general has verified that each such creditor has sent the owner and the general the appropriate pre-claim notice.

The insolvent subcontractor has often given its bank a security interest in accounts receivable.  If the bank demands that the general contractor pay the bank any amounts earned by the subcontractor pursuant to the bank’s security interest, the general only can pay those lower tier creditors who have given a proper pre-claim notice and have enforceable lien rights.  If a lower tier creditor has failed to preserve its lien rights against the project, the bank’s security interest in the subcontractor’s accounts receivable has priority over the unsecured claims of lower tier creditors.

If the insolvent subcontractor needs to obtain further materials or work from a critical lower tier supplier or sub-subcontractor who has failed to submit the required pre-claim notice, the supplier or sub-subcontractor can give the required notice to the owner and the general to gain priority over a bank’s security interest.  The notice will then be effective retroactively as to all materials or equipment furnished within 60 days prior to delivery of the notice.  This will allow the general to pay critical suppliers for any materials or equipment furnished within the last 60 days or which remain to be furnished to complete the project.