Frequently Asked Questions About The Notice Of Contract Mechanism For North Carolina Contractors And Subcontractors

The Notice of Contract Mechanism is one of the most misunderstood mechanisms within lien law, and can have significant financial impacts on general contractors and subcontractors alike.

As construction attorneys in North Carolina, we believe we've heard every permutation of question and situation in this space and offer insight into some of them here.

However, in addition to the standard disclaimer at the end of all of our published articles, we will call attention to the necessity of having an attorney review your particular issue and circumstance and not relying on an article on the Internet (or anything you read on AI) for legal advice.

With that said, here are our team's most frequently asked questions and answers regarding the Notice of Contract Mechanism for North Carolina Contractors and Subcontractors.

FAQ

Question: I am the general contractor. What if I post the Notice of Contract at the jobsite and fail to file it with the clerk of court?

Answer: You have failed to comply with the requirements of the statute and therefore, will not have the protection provided by N.C. Gen. Stat. § 44A-23. Posting without filing is of no effect. Similarly, filing without posting is of no effect. Both must occur.

Question: I posted Notice of Contract, and after making several payments to the first-tier subcontractor, received a Notice of Subcontract from one of its second-tier subcontractors. Should I provide those second-tiers with Notice of Payment when I make further payments, and have I lost the benefit of a Notice of Contract because I already paid the first-tier?

Answer: You should provide Notice of Payment to the subcontractors each time you pay the first-tier subcontractor subsequent to receiving the Notice of Subcontract. You have not lost the benefit of the Notice of Contract mechanism, although the statute is not explicit on this point.

A close reading of this statute suggests that the Notice of Payment obligation is triggered only after receiving the Notice of Subcontract. You cannot practically be obligated to provide a Notice of Payment to a second or third-tier subcontractor who has not provided Notice of Subcontract.

However, if the Notice of Subcontract is provided at any point subsequent to the Notice of Contract being provided, then any subsequent payments to the first-tier subcontractor must have Notice of Payments sent within five days to the second or third-tier subcontractors.

Question: I have one contract with the owner, but it is for separate buildings, each of which has its own permit. Do I need separate notices of subcontract?

Answer: Ideally, the permit would follow the contract, and thus you would have one permit per contract with the owner. In this situation, however, it would probably be best to follow the subcontracts. If there are different subcontracts relating to each permit, then you should have a separate Notice of Contract for each permit.

However, if you will have one subcontract with each first-tier subcontractor for the entire project, it probably makes sense only to have one Notice of Contract posted and filed.

Question: I provided notice to the lien agent. Doesn't that do the same thing as Notice of Contract or Notice of Subcontract?

Answer: No, the two mechanisms are totally different. You should certainly provide notice to lien agent, but doing so protects other aspects of your own lien rights—it does not satisfy the requirement to post Notice of Contract if you are a general contractor or to provide Notice of Subcontract if you are a second or third-tier subcontractor.

Question: I'm a first-tier subcontractor and was paid in full by the general contractor. The general contractor didn't post the Notice of Contract. Does that mean I'm off the hook and can make the general contractor pay my subcontractors?

Answer: No. As a first-tier subcontractor, you remain liable for your obligations. Notice of Contract is not for your benefit. Its purpose is to help general contractors and second and third-tier subcontractors manage the risk of your default. You will be required to pay your subcontractors what you owe them, or the general contractor will be entitled to recover from you what it had to pay them to address their claims, which you wrongfully failed to pay.

Question: I work for a general contractor, and I handle the checks. Sending out certified letters each time I pay a first-tier subcontractor is expensive and time-consuming. This doesn't seem like something that is worth it?

Answer: Yes, it is. It will only take one instance of your employer having to double-pay a five-figure (or even six-figure) amount, plus attorneys' fees, for them to quickly determine that it is "worth it."

Question: I'm a fourth-tier supplier on a large construction project. One of my deliverymen found a Notice of Contract posted at the jobsite. Should I send in a Notice of Subcontract?

Answer: No. While there is no harm from doing so, there is also very little benefit. Fourth-tier and more remote subcontractors and suppliers do not have a right to assert a subrogation lien on real property and therefore, cannot force double payment in the same way that a second or third-tier subcontract can. You should be vigilant about getting paid timely, asserting a lien upon funds, and asserting a payment bond claim.

Question: Is the Notice of Subcontract the same thing as the Notice of Public Subcontract? If not, what's the difference?

Answer: It's not exactly the same. Notice of Subcontract is used on private (nongovernment-owned) projects. In North Carolina, there is a mechanism on state-owned projects that is similar to but different from the Notice of Contract mechanism. On state-owned projects, the second-tier and more remote subcontractors must provide a Notice of Public Subcontract to protect their bond rights.

Question: I'm a first-tier subcontractor. Should I provide a Notice of Subcontract in response to the posting of a Notice of Contract?

Answer: No. As a first-tier subcontractor, you cannot force double payment from a general contractor—the general contractor already having paid you is a defense to your payment claim. Similarly, the general contractor already knows you're there, so there is no need to "wave that flag."

Question: I'm the project owner. Should I be using the Notice of Contract mechanism and, if so, why?

Answer: Yes. The statute allows you to post Notice of Contract. Although you are not technically at risk of having to pay twice for the same work, you will want a lien-free project at the end of the construction work. Having another tool to thwart or defend against subcontractor liens against the real property is, therefore, beneficial.

It is recommended that the owner include a provision in the contract with the general contractor requiring the general contractor to post and file Notice of Contract and to follow the Notice of Contract process otherwise.

Question: If there is a payment bond on the project, does the Notice of Contract affect claims against that bond, and, if so, how?

Answer: No, the Notice of Contract mechanism or following it will have no effect on claims against the bond or defenses thereto. Claims against the bond and defenses thereto will be governed by the terms of the bond itself (a slightly different rule applies on government projects, which includes a requirement that the bond be obtained).

Long Question: I'm a second-tier subcontractor. I sent in a Notice of Subcontract when I saw the Notice of Contract posted at the jobsite. But I never received any notices of payment when the general contractor paid the first-tier subcontractor for whom I was working.

I asserted a subrogation lien on real property, but the general contractor is now saying that they were paid in full by the owner and that the general contractor provided a final lien waiver to the owner, both before I filed my subrogation lien on real property.

Based on what you said above, should I still be able to recover since the Notice of Contract process wasn't complied with by the general contractor?

Long Answer: No. Although the general contractor did not strictly comply with the Notice of Contract process, such failure just puts the general contractor back in the position they would have been if they had never posted Notice of Contract.

If what the general contractor is telling you is true, your claim fails for two reasons: 1) as noted above, your subrogation claim is still limited by the amounts owed from the owner to the general contractor which, under these facts, is $0; and 2) the Notice of Contract statute also contains a provision that says the general contractor can waive both its lien rights and your subrogation lien rights at any point prior to you fully perfecting your subrogation lien.

Note, for this reason, subcontractors should, regardless of whether Notice of Contract is posted, still assert their lien upon funds and their subrogation lien on real property as soon as possible after completing their work.

Question: I'm a subcontractor. I thought I could lien funds at any time and that I had 120 days from the last furnishing to assert a lien on real property. Why do I need to be in a hurry?

Answer: As noted in the previous response, payment from the owner to the general contractor is a defense to a lien upon funds. Similarly, there is no right to a subrogation lien if the owner has paid the general contractor in full or if the general contractor has provided the owner with a final lien waiver.

Conclusion

As stated in Part 1 of this series, a general contractor who does not strictly follow the Notice of Contract mechanism on private projects risks double payment.

We suggest general contractors make this Notice of Contract mechanism a standard part of someone's job for each and every private project.

As a subcontractor, if you do not provide Notice of Subcontract on private projects where Notice of Contract is posted and filed, you risk being left with the proverbial bag in the case of a first-tier subcontractor default.

Again, after saying this steadily for years, we urge you to make this standard practice at your company.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.