By Charles L. Stern, Jr.
Partner, Charles L. Stern, Jr. clarifies a new court ruling by the Louisiana Third Circuit Court of Appeal that upholds that property owners and developers can find themselves with unanticipated and open-ended liability to subcontractors and suppliers if they fail to file a properly recorded notice of termination.
New Court Ruling Alert: Tree & Spraying Service, Inc. v. White-Spinner Construction, Inc., 2010-1187 (La. App. 3 Cir. 6/1/11), 2011 WL 2135453, a recent case from the Louisiana Third Circuit Court of Appeal, establishes that the failure of an owner to file a notice of termination means that the lien period remains open indefinitely.
Hidden Danger that Property Owners Face Under the Louisiana Private Works Act
A recent Louisiana court decision highlights a hidden danger that property owners face under the Louisiana Private Works Act. The same case also casts doubt on the enforceability of forum selection clauses in Louisiana, a device often used in an effort to obtain a literal home court advantage in the event of a future contract dispute.
The Louisiana Private Works Act, a version of which can be found in virtually every state, protects subcontractors and suppliers from the possibility that the general contractor will be unable to pay them for their work and materials. Under the act, a subcontractor or supplier is given a direct claim against the owner of the property on which the work was performed, as well as lien rights against the property, if the general contractor does not make timely payment. (The property owner can avoid this type of direct claim if the general contractor posts a bond for payment and performance, but that is a subject for another article.)
The Private Works Act sets strict time limits for the submission of such a lien claim. In particular, if notice of the contract between the owner and general contractor is filed in the public records, as the act requires, then a lien claim must be filed within 30 days of the owner’s filing of a notice of termination of the work. La. R.S. § 9:4822(A).
What Happens If the Owner Fails to File a Notice of Termination?
So what happens if the notice of contract has been properly filed at the beginning of the job, but the owner fails to file a notice of termination?
In Thompson Tree & Spraying Service, Inc. v. White-Spinner Construction, Inc., 2010-1187 (La. App. 3 Cir. 6/1/11), 2011 WL 2135453, according to the Louisiana Third Circuit Court of Appeal, which covers most of southwestern Louisiana, the failure of the owner to file a notice of termination means that the lien period remains open indefinitely. The court reasoned that the filing procedures were designed to cut off otherwise valid claims of subcontractors and suppliers, and a property owner therefore must follow them strictly to take advantage of the statutory time limit.
It should be noted that the Third Circuit’s decision parallels an earlier decision of the First Circuit, based in Baton Rouge, and of the federal Fifth Circuit, and therefore the rule that it adopts is likely to be applied throughout Louisiana.
The Ramifications for Property Owners and Developers
The holding in Thompson can have serious ramifications for property owners, developers and others who build on or renovate their holdings. For one thing, title to property as to which there is a recorded notice of contract will remain clouded unless and until a notice of termination has been filed and the requisite 30-day period has passed. Also, a property owner can find himself with unanticipated and open-ended liability to subcontractors and suppliers absent a properly recorded notice of termination. Experienced counsel can help owners avoid these and other traps for the unwary, traps that abound under the Private Works Act.
Casting Doubt on the Validity of Forum Selection Causes, a.k.a. “Home Court Advantage”
The Thompson case also casts doubt on the validity of forum selection clauses, which had been thought generally enforceable in Louisiana. Contracting parties with an edge in bargaining power often include provisions in their standard contracts requiring that any future dispute arising under the contract be heard only in a particular forum, generally the court of the party’s home state or parish. The idea is to build in a forum of “home court advantage,” as well as to litigate, when the need arises, in a forum convenient to the party requesting the clause.
In Thompson, one of the parties had included a clause that all contract claims be litigated in Alabama. Louisiana courts generally have been well disposed toward such provisions, but the Third Circuit bucked that trend. It held that under Article 44(A) of the Louisiana Code of Civil Procedure, forum selection clauses cannot be enforced in Louisiana as a matter of public policy. The Third Circuit acknowledged that there is language from other decisions, including some from the Louisiana Supreme Court, that could be read to validate most forum selection clauses, but it did not find those other cases persuasive.
It likely will take a definitive ruling from our Supreme Court to resolve what has now become a confusing area of Louisiana law.