The law is frequently blind to the realities of business. It is important to keep that notion in mind when considering expansion into a new state, country or territory, because while actual work or process may change very little, the laws that apply can be drastically different.
Licensing Rules and Enforcement Vary Greatly
Business people in the construction industry understand that each state’s licensing schemes are different, but the importance of this warrants repeating and discussion. Contractors work in a highly regulated industry, and the regulations are different state-by-state and sometimes county-by-county.
Licensing rules fall into one of three high level categories:
- the state requires a license;
- the state does not require a license; or
- a registration is required in the state and the contractor must maintain a bond.
Whatever the rule, it is critical to know, understand and follow it, because the consequences may be significant.
In many states such as California, Arizona and Washington, unlicensed contractors have zero recovery options if they are unpaid, and in many cases, may be sued and forced to return money they were paid. It doesn’t matter if it’s a $1 billion skyscraper. If the contractor is not licensed, in some places, it is doing the work for free.
In other states, recovery will be substantially limited and subject to state penalties for non-licensing. All in all, it’s bad news for contractors without a license. Again—know and follow the licensing rules at the onset.
Liens, Notices and Remedies
Mechanics liens and bond claims are an asset to the organization, and by far, the best legal remedy available if unpaid on a project. Nevertheless, every state’s laws regulating these instruments are different and nuanced. Don’t think the rules in one state will cross over and apply to another state. They will not.
Don’t shrug them off to avoid the hassle. Compliance with the rules are worth the hassle because protecting lien rights can virtually guarantee company payment on every project. When entering a new state, understand the lien regulations and requirements—and follow them.
A Contract Means Different Things in Different Places
When a contractor signs a contract, it may think it understands what the contract says, but even the most artfully written contracts are subject to interpretation. Every state interprets contract language differently, which means that a single phrase can mean different things in different places.
This frequently happens with provisions like “pay when paid” clauses or “no lien clauses.” Some states prohibit these clauses outright and will nullify a contract, or the provision, if it’s in the contract. Other states will restrict its effectiveness. See how pay when paid provisions are different in different states.
The same principal applies to indemnity clauses, no damages for delay clauses, payment timing provisions, payment penalty provisions, etc. It’s very important that an attorney review contracts, credit applications and other documents when entering a new state.