Failure to Serve Notice of Nonpayment Renders Lien Invalid

By Wally Irvin | August 13, 2015

The Tennessee Court of Appeals affirmed Tennessee’s requirement that remote contractors (subcontractors, sub-subcontrators, material suppliers to a subcontractor, etc.) must serve notices of nonpayment on both the owner and prime contractor (the General Contractor).  In Diaz Construction v. Ind. Dev. Board of Metro. Gov’t of Nashville and Davidson County, a remote contractor appealed the trial court’s dismissal of its lien enforcement action.  Diaz, a lower-tier subcontractor, provided a notice of non-payment to the owner and the remote contractor with whom it contracted on the project.  However, Diaz failed to provide the requisite notice to the prime contractor.  Tennessee law requires remote contractors to provide notice of nonpayment to the owner and the “prime contractor in contractual privity with the remote contractor.”  Diaz contended it satisfied this requirement by serving notice on the owner and the remote contractor with whom it contracted.  The court of appeals, agreeing with the trial court, found otherwise.  The purpose of requiring notice is to allow the owner and prime contractor an opportunity to investigate and cure its subcontractors failure to pay.  Presumably, the remote contractor with whom Diaz contracted knew of its unpaid balance.  In contrast, it is not as likely the prime contractor on the project knew of the payment dispute.  The court of appeals found the phrase “prime contractor in contractual privity with the remote contractor” did not mean the entity with whom the remote contractor contracted, but the prime contractor upstream of the remote contractor.  By not providing a notice of nonpayment to the prime contractor, the remote contractor took away the prime contractor’s opportunity to remedy the delinquency.  More importantly, the failure to serve the notice of nonpayment on both the owner and the prime contractor meant the remote contractor failed to perfect its lien claim, rendering the lien invalid.  Accordingly, the court of appeals affirmed the trial court’s decision to dismiss the lien claim.

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