This year, North Carolina owners, developers, and contractors will need to read up on new legislation that could fundamentally affect their businesses. On January 26, 2022, Governor Roy Cooper signed Session Law 2022-1. This legislation, most of which is effective as of March 1, significantly changes North Carolina General Statutes applicable to in-state construction projects (except for Department of Transportation design-build projects). Overall, Session Law 2022-1: (1) clarifies and updates statutory provisions related to the design-build contracting process; (2) renders void any unenforceable provisions in construction and design-professional agreements requiring lien waivers or claims as a condition for progress payments, with limited exceptions; and (3) modifies attorneys’ fees provisions applicable in statutory lien actions.

Design-Build Contracting Changes

Section 2 of Session Law 2022-1 provides new definitions in design-build contracts that apply to “design-professionals,” “first-tier subcontractors,” “licensed contractors,” “licensed subcontractors,” “unlicensed subcontractors,” “costs of the subcontractor work, “general conditions,” and “key personnel.” Section 2 also requires design-builders to select their proposed project team by one of two methods outlined in Section 2(a)(c)(8)(a).

The first method permits a design-builder to submit a list of licensed contractors, licensed subcontractors, and design professionals. The second permits submission of a list of just the licensed contractors and design professionals and an outline of how the design-builder will use open subcontractor selection based on the North Carolina General Statutes. Additionally, design-builders must now notify the owners of any changes in project team key personnel. There are also new requirements for design-criteria packages used in design-build bridging contracts, such as instructing the public owner that it cannot require the design-builder to provide the costs of subcontractor work in such packages. Finally, Section 2 requires the public owner to provide a list of general conditions items for which the design-builder is to provide a fixed fee in its response.

Lien Waiver Changes

Until Governor Cooper signed Session Law 2022-1, North Carolina law only invalidated waivers of the right to assert a lien if the prospective lien claimant was asked to waive its lien rights as a condition for obtaining the contract for the work that might give rise to a lien claim. A complete lien waiver was generally enforceable at any point thereafter. That is no longer the case with Section 3 section 22B-5 of the new legislation. In-state lien waivers are now subject to further restrictions on their enforceability. Specifically, the new law states that “[p]rovisions in lien waivers . . . purporting to require a promisor to submit a waiver or release of liens or claims as a condition of receiving interim or progress payments due from a promise . . . are void and unenforceable unless limited to the specific interim or progress payment actually received by the promisor in exchange for the lien waiver.” N.C.G.S. §22B-5 (2022). In other words, a lien waiver is unenforceable unless the party waiving its lien rights receives payment for the amounts waived. Two exceptions to this rule remain: (1) lien waivers for final payments, and (2) settlement agreements to resolve disputed claims after the claimant has identified the claim in writing, regardless of whether a lawsuit or arbitration is initiated.

Section 3’s section 22B-5 essentially creates a new safeguard for contracting parties that may fail to do their due diligence. The new legislation automatically conditions and limits what type of lien waiver can be included in an agreement, removing that burden from contractors, subcontractors, and suppliers. 22B-5 protects potential lien claimants from waiving lien rights for work subject to the progress payment but not yet paid, disputed claims, and for future lien rights not yet accrued. Parties presented with lien waivers should continue to be wary, however. Preserving one’s lien rights is critical to ensuring payment for labor, materials, and furnished equipment, and it is not clear whether courts will limit 22B-5’s protections in future litigation. Contracting parties should continue to confirm that lien waiver language explicitly states that waiver is conditional upon actual receipt of the amount owed on the progress payment.

Recovery of Attorneys’ Fees in Construction Lien Disputes

Section 4, Session Law 2022-1’s final amendment to North Carolina law, redefines when counsel in construction lien disputes can recover attorneys’ fees if those disputes involve personal or real property. Specifically, the new legislation provides that the prevailing party in a dispute over fees is the party whose monetary position is closest to the amount of the judgment or award when compared with the amount in controversy as measured at the beginning of the proceeding. Also, when a party serves an offer of judgment or written settlement offer at least 30 days before trial or arbitration, the last offer is considered as the party’s monetary position for purposes of determining the amount in controversy. Arbitrators also are now empowered to award attorneys’ fees and those fees will be taxed as part of the court costs included in a final judgment or arbitration award involving a lien claim. The court or arbitrator must consider all facts and circumstances when determining the amount of attorneys’ fees and expenses to be awarded to the prevailing party.

North Carolina’s construction industry, and construction lawyers in general, must now contend with new procedural requirements and limitations when they contract and litigate. The new legislation highlights just how important it is for attorneys to stay abreast of new legal developments, both in the courtroom and in the state legislature.

February 18, 2022/by Construction