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    SUPPLIERS ON OPEN ACCOUNTS BEWARE!

    Filing a timely mechanic's lien is crucial to enforcing your mechanic's lien rights on a particular project. The timeliness question is often raised where material is sold and delivered by a supplier on an open account. A recent Virginia Supreme Court decision has important implications for suppliers of construction materials in Virginia and may mean the difference between a collectible and an uncollectable accounts depending largely on a supplier's paperwork. In a case decided this year, the Virginia Supreme Court has drawn a distinction between "running accounts" for the supply of materials to a particular project and "open accounts" for general use by a contractor.

    Remember that in Virginia, a Memorandum of Mechanic's Lien must be filed no later than ninety (90) days after the end of the month in which the materials were furnished. The question is whether each delivery is a separate contract with its own time limits and requiring that multiple liens must be filed for each separate delivery of materials or whether all of the deliveries should be considered part of one contract for the supply of the project with time limits running from the last delivery on the project. In the later case, one mechanic's lien may be filed covering all deliveries to the project. The point is important because frequently the course of supply on the job is long enough to make a lien claim late, if measured from the first delivery as opposed to the last delivery. If the filing of the Memorandum of Mechanic's Lien is late, the lien claim may be completely invalid, and the account rendered practically uncollectable.

    If the materials were supplied pursuant to an "open account" for general use by a contractor, then each delivery is a separate and independent contract, and a separate Memorandum of Mechanic's Lien must be filed within ninety (90) days of the last day of the month in which the supply of materials under each open account delivery was made. This means a supplier would have to file multiple mechanic's liens soon after each delivery. If, however, each delivery of materials is made under a "running account" on a particular project, then it will be deemed to constitute a single and continuing contract to supply to a particular project, and a single Memorandum of Mechanic's lien could be filed within ninety (90) days of the last day of the month in which the materialman supplied the last delivery of materials to the project. That single mechanic's lien could claim for all material deliveries supplied to the project through that date and would not have to be filed until all deliveries had been made.

    The Virginia Supreme Court has suggested a running account (continuing contract) for the supply of materials will be found where a course of dealing between the parties or an understanding between the parties shows that the deliveries of materials were supplied for a particular project, rather than merely for general use by a contractor, and where there is no evidence that an open account was intended. The determination whether the materials were supplied under a running account or on an open account is a question of fact, and the Court should consider the factors and circumstances surrounding the dealings of the parties, including their agreement, its purpose, the object of the work done or the materials furnished, the time when the work was done or the materials furnished, and other circumstances which suggest the nature of the parties intentions.

    Evidence of a single running account (continuing contract) is strongest where the materials supplied are accounted for and furnished to each parcel under account numbers or invoices referencing each specific parcel. The Court has focused on the parties separation of the accounts and invoices among separate parcels of land to which the materials were supplied. Where the materials were supplied pursuant to "takeoffs" for each project and were accounted for, delivered, and invoiced to each parcel of land, the Court has found that the materials were supplied under a single continuing contract for each parcel. The Court paid particular attention to method the suppliers used to account for the particular projects, invoicing for each project, and the circumstances of each order and delivery.

    In light of all this, suppliers will want to be cautious to make sure that their open account is construed as a running account consisting a single continuing contract. In general, suppliers should set up separate sub-accounts for each lot, parcel, or unit for which materials is being supplied, and maintain a separate records for orders, deliveries, and, invoices and payments relating to each lot, parcel, or unit. More specifically, suppliers should do the following to ensure their accounts are characterized as "Running Accounts" rather than "Open Accounts":

    • Credit applications should make reference to contracts for the supply of materials to projects or lots or identifiable parcels of land. Credit applications or supply agreements can be drafted to support the fact that all deliveries made to a given lot in a project constitute a single contract. Use the words "running account" and avoid the use of the words "open account".
    • Take-offs, Materials Lists, or Estimates of the expected total of all materials to be supplied to a particular lot should be made, sent to the purchaser and maintained in the files.
    • Purchase Orders should be prepared for the house or lot as a whole. Every effort should be made to support the fact that each project (house, unit, building) is a separate contract.
    • Invoices should show materials sold for or delivered to specific lots and separate invoices should be maintained for separate lots. Invoices and accounts should never include charges for deliveries to multiple and unrelated projects or for general use accounts.
    • Delivery tickets should specify lot numbers.
    • Subsidiary ledger accounts should indicate billings and payments for each lot.
    • Avoid sales or deliveries to the contractors yard or general inventory. All sales should be for a specific lot and materials picked-up or delivered to the contractor's yard need to be identified to a particular project and invoiced separately.

    While none of the foregoing is an absolute requirement or determining factor, the court mentioned each in one way or another as indicative of the intentions of the parties. This Alert is provided as service to the construction community in general and is not intended as legal advice in any specific instance. We hope this will be of use to you.

    Copyright 2007 by Cowles, Rinaldi, Judkins & Korjus, Ltd.