MECHANIC’S LIEN BASICS

Construction liens are governed by Chapter 779, Subchapter I of the Wisconsin Statutes.[1] In Wisconsin, a “construction lien is a remedy created by statute to insure payments to contractors, subcontractors, tradesmen, laborers [,] and materialman who have furnished labor or materials in good faith for the improvement of another’s property.”[2] Wisconsin’s lien laws are remedial in nature, and therefore are liberally construed.[3] However, a lien is a statutory right and “must be pursued as the statute directs, or it fails.”[4]

Requirements

Pre-Lien Notice

In Wisconsin, there are differences in the pre-lien notice requirements which are dependent upon the project type including public versus private.  Pursuant to Wis. Stat. § 779.02(1)(c) there is an exception to certain notice requirements for private projects “where more than 4 family living units are to be provided or added by such work of improvement, if the improvement is wholly residential in character, or in any case where the improvement is partly or wholly nonresidential in character.” Thus, there are differing notice requirements for a private commercial project or large residential project (one where four family units or more are to be provided or added).

Lien rights will exist only for work related to improvements “on the owner’s land” as defined under Wis. Stat. § 779.01(2)(a), and then only if the contractor, subcontractor or supplier complies with the applicable notice and claim procedures. On private small residential projects, in order to perfect lien rights, a contractor must (if not already provided in a written contract) provide the owner the notice set forth in Wis. Stat. § 779.02(2) within ten (10) days after first furnishing labor or materials. This notice (whether separately given or included in a written contract) is required to be in at least 8-point bold type, if printed, or in capital letters, if typewritten. The notice notifies the owner of the potential lien rights of “those who either contract directly with the owner or those who give the owner notice within 60 days after they first perform, furnish, or procure labor, services, materials, plans or specifications for the construction.” This ten-day notice is not required to be given on private commercial or large residential projects.[5]

On private small residential projects, subcontractors, other than those excluded by statute, are required to give a notice to the owner within 60 days after first furnishing labor or materials, again following statutorily prescribed procedures.

A late notice will still be effective to protect labor and materials furnished after the date of the late notice.[6]

As noted above, the ten-day and 60-day notices are not required on private commercial or large residential projects. However, Wisconsin has an “intent to file lien” requirement that applies to all private projects. Wis. Stat. § 779.06(2) states that “[n]o lien claim may be filed or action brought thereon unless, at least 30 days before timely filing of the lien claim, the lien claimant serves on the owner a written notice of intent to file a lien claim.” This notice is required to briefly state the “nature of the claim, its amount and the land and improvement to which it relates.” As discussed below, since this 30-day notice is required to be provided prior to the filing of a lien claim (and since lien claims must be filed within six months of the last performance of work), this notice must be given within five months of the last performance of work.

Notice Filing Requirements

Under Wis. Stat. § 779.06(1), a lien claim must be filed within six months of the date that the lien claimant last performed work on the project. A lien claim is to be “filed in the office of the clerk of circuit court of the county in which the lands affected by the lien lie.” The claim must include a copy of the 30-day notice referred to above. The determination of when last labor or materials is furnished can be critical to lien effectiveness.  For purposes of determining the date of last work the labor must be related to the original installation; any warranty and/or repair work do not qualify.[7] The owner must be served with a copy of the lien claim within 30 days after filing of the claim.[8]

Enforcement and Foreclosure

Foreclosure

Pursuant to Wis. Stat. § 779.06(1), in order to foreclose on a lien claim, an action must be commenced against the owner within two years from the date of filing the claim for lien. Wis. Stat. § 779.09 provides that Chapter 846 of the Wisconsin Statutes controls the foreclosure of liens. Chapter 846 deals with mortgage foreclosures. Pursuant to Wis. Stat. § 779.09, all persons having filed claims for liens may join as plaintiffs, and if they do not join, they may be joined as defendants. If a contractor fails to provide a satisfaction of lien when required, it is liable for one-half the amount claimed in the lien.[9] Additionally, filing a false, sham, or frivolous lien claim can constitute slander of title.[10]

Sale

All sales pertaining to judgments obtained in lien foreclosure actions shall be “noticed, conducted and reported in the manner provided for the sale of real estate upon execution and shall be absolute and without redemption.”[11] If the sum realized from the sale is insufficient after paying the costs of the action and the costs of making the sale to pay the liens in full, they are to be paid proportionately among the several lien claimants.[12]

Ability to Waive and Limitations on Lien Rights

A lien waiver is valid and binding whether or not consideration was paid therefore.[13]However, a provision in a contract requiring any person entitled to a construction lien to waive such lien or to claim against a payment bond before being paid for labor, services, or materials is void.[14]

PUBLIC PROJECT CLAIMS

State and Local Public Work

Lien rights arise against the bond provided by the prime contractor, or the bonds posted by the prime contractor, on public projects.[15] If the prime contractor does not dispute the claim within 30 days after it is served, the amount claimed shall be paid to the subcontractor and charged to the prime contractor.[16] If the prime contractor disputes the claim, the subcontractor or prime contractor must bring an action within 3 months after the time the notice is required.[17]

However, bond coverage may be more restricted than that available on private projects. Second-tier subcontractors and suppliers are not required to be covered by the public project bond.

STATUTES OF LIMITATION AND REPOSE

Statute of Limitations and Limitations on Application of Statutes

The statute of limitations for contract actions in Wisconsin is six years after the cause of action accrues.[18] However, the statute of limitations for claims for salary, wages or other compensation for personal services is two years.[19]

The “discovery rule,” generally applicable to tort claims in Wisconsin, has been expressly rejected for contract claims, regardless of whether the cause of action is extinguished before the claimant is aware of the damage.[20] In so holding, the Wisconsin Supreme Court noted that contract breaches may sometimes be latent and undetectable. In CLL Associates, the Court also rejected the plaintiff’s constitutional due process challenge.

The statute of limitations for negligence actions is six years for damage to property (real or personal),[21] and three years for damages for personal injuries (physical or emotional) or wrongful death.[22]

Statute of Repose and Limitations on Application of Statutes

Wisconsin’s statute of repose period has just recently been shortened from 10 years to 7 years.[23] Wis. Stat. § 893.89 creates a 7 year “exposure period,” which begins to run on the date of substantial completion.  The accrual component of the statute provides that where a claimant sustains damages during the period between five and seven years after substantial completion, the time for commencing an action is extended for three years after the date on which the damages occurred.  Thus, under the statute, there is an absolute 10 year cut off for commencement of suit following substantial completion.  This law applies to material suppliers, as well, although it does not cut off longer warranty periods and does not apply to contribution claims.

Notwithstanding the above provisions, a claimant may not be able to take advantage of the statute of repose if a shorter statute of limitations applies.  Under Wis. Stat. § 893.89(3), if the claimant sustains damages as the result of a construction defect, and the statute of limitations applicable to the damages bars commencement of the cause of action before the end of the seven year exposure period, the statute of limitations applicable to the damages applies.

Wis. Stat. § 893.89(4) provides certain exceptions to the repose statute. Pursuant to the exceptions, the statute does not apply to:

(a)       A person who commits fraud, concealment or misrepresentation related to a deficiency or defect in the improvement to real property.

(b)       A person who expressly warrants or guarantees the improvement to real property, for the period of that warranty or guarantee.

(c)       An owner or occupier of real property for damages resulting from negligence in the maintenance, operation or inspection of an improvement to real property.

(d)       Damages that were sustained before April 29, 1994.

Lastly, Wis. Stat. § 893.89 provides for a final exception that has not been widely used or applied by Wisconsin Courts. Specifically, § 893.89(2) states that “[t]his subsection does not affect the rights of any person injured as the result of any defect in any material used in an improvement to real property to commence an action for damages against the manufacturer or producer of the material.”

PRE-SUIT NOTICE OF CLAIM AND OPPORTUNITY TO CURE

Wis. Stat. § 895.07(2) provides notice requirements and an opportunity to repair “construction defects” primarily with respect to dwellings. Pursuant to the statute, the term “construction defects” refers to a defect in a warranty provided by a contractor or supplier to a consumer, or deficiencies in the construction or remodeling of a dwelling resulting from:  1) defective material; 2) violation of applicable codes; or 3) failure to follow accepted trade standards.

Under the same statute, a claimant is required to give written notice to the contractor at least 90 working days before commencing an action. The notice must provide a description of the claimed defect and an opportunity to repair or remedy the alleged construction defect.

Within 15 working days after a claimant serves the notice of claim, or within 25 working days if a contractor makes a claim for contribution from a supplier, the contractor must serve on the claimant a written offer to repair or remedy the construction defect at no cost to the claimant, a written offer to settle the claim by monetary payment, a written offer including a combination of repairs and monetary payment, or a statement that the contractor rejects the claim, stating the reasons for rejecting the claim, and a comprehensive description of the evidence which substantiates the reason for rejecting the claim.[24] As an alternative, the contractor may provide a proposal for inspection of the dwelling. Detailed procedures for the proposal for inspection are spelled out in the statute.

INSURANCE COVERAGE AND ALLOCATION ISSUES

General Coverage Issues

Under Wisconsin law, a breach of contract may be an “occurrence” or “accident” under a CGL policy.[25]  Thus, the mere fact that a claim against a contractor arises in contract, rather than tort, does not preclude CGL coverage.  However, “faulty workmanship” performed under the contract is generally not considered an accident, and therefore claims that allege damages arising solely due to faulty workmanship are typically found not to constitute an “occurrence” for purposes of CGL coverage.[26] Thus, to constitute an “occurrence,” courts have generally held that the faulty workmanship must cause some accidental—i.e., unintended and unanticipated—damage to property other than the property that was the subject of the faulty work. Yet, “[a] result, though unexpected, is not an accident[]; rather, it is the casual event that must be accidental for the event to be an accidental occurrence.”[27]

In American Family Mut. Ins. Co. v. American Girl, Inc., the Wisconsin Supreme Court addressed a number of the insurance issues most common in construction litigation.  The defendant was a general contractor, who hired a soil engineering subcontractor to analyze the soil conditions for construction of a warehouse.  The soil engineer gave faulty site preparation advice, which resulted in excessive settlement of the soil, causing cracking and buckling of the warehouse foundation, ultimately requiring it to be torn down.  The insurer denied coverage on the grounds that the claim did not allege an “occurrence,” and that coverage was excluded under the “business risk” exclusions.  The court first found that the claim, though sounding in breach of contract, alleged an occurrence—namely, the unexpected settling of soil caused by the faulty site preparation advice.  The Court further concluded that the economic loss doctrine did not preclude coverage, holding that the economic loss doctrine does not determine insurance coverage, which instead turns on policy language.

The Court then addressed a number of exclusions in the CGL policy.  The Court rejected the insurance company’s argument that the “contractually-assumed liability” exclusion applied, holding the exclusion does not exclude coverage for all breach of contract liability.[28] Instead it excludes coverage for liability that arises because the insured has contractually assumed the liability of another, as in an indemnification or hold-harmless agreement, neither of which was present in the American Girl case.  Ultimately, the Court concluded that the property damage would be excluded under the “your work” exclusion.  However, because the policy contained a subcontractor exception, and the property damage arose out of the work of the subcontractor soil engineer, the exclusion did not apply, and the policy provided coverage for the claim against the general contractor.

Trigger of Coverage

Wisconsin follows the continuous trigger theory. Under this theory, occurrences during multiple policy periods are deemed to have occurred continuously, so that each of the various policies in effect is triggered.[29]

Allocation Among Insurers

Although not specifically decided, Wisconsin courts would likely apply generally accepted insurance law principles in a dispute involving competing insurers. Where an insured has more than one insurer (i.e., a primary insurer and a secondary/excess insurer), the primary insurer has the sole obligation to provide the defense for the insured (absent a contract to the contrary between the two insurers). See Loy v. Bunderson.[30] Loy stands for the proposition that the duty to defend is personal to each insurer, and a carrier is not entitled to divide the duty or require contribution from another absent a specific contractual right. This same rule appears to apply to the allocation of damages. Absent a written contract that specifically sets forth the allocation between the insurers, damages would be apportioned in accordance with the provisions of the respective insurance policies.[31]

CONTRACTUAL INDEMNIFICATION

Wisconsin allows a contract to indemnify one against loss or damage from his own negligent act if it is expressed in clear and unequivocal terms.[32] Yet, “even in the absence of such specific language the court will construe the agreement to provide such indemnity if that is the only reasonable construction.”[33]

However, indemnity provisions for construction agreements are governed by Wis. Stat. § 895.447. Under this Statute, any provision to limit or eliminate tort liability as a part of or in connection with any contract, covenant or agreement relating to the construction, alteration, repair or maintenance of a building, structure, or other work related to construction, including any moving, demolition or excavation, is against public policy and void.  Under (2), the Statute does not apply to any insurance contract or worker’s compensation plan.

Wisconsin courts have concluded that because § 895.447 voids agreements in construction contracts that limit or eliminate tort liability, thereby limiting the parties’ common law right to contract freely, the Statute must be interpreted narrowly, placing the least possible restriction on the common law right.[34] Additionally, while § 895.447 does not permit parties to limit or eliminate tort liability in a construction contract where tort liability would otherwise obtain, the statute becomes irrelevant if there is no tort claim to begin with.[35]

CONTINGENT PAYMENT AGREEMENTS

Enforceability

Wis. Stat. § 779.135(3) renders void:

Provisions making a payment to a prime contractor from any person who does not have a contractual agreement with the subcontractor, supplier, or service provider a condition precedent to a prime contractor’s payment to a subcontractor, supplier, or service provider.

However, Wis. Stat. § 779.135(3) does not prohibit contract provisions that may delay a payment to a subcontractor until the prime contractor receives payment from any person who does not have a contractual agreement with the subcontractor, supplier, or service provider.

In essence, § 779.135(3) prohibits “pay if paid,” clauses but permits “pay when paid” clauses. “Pay if paid” clauses operate to shift the risk of non-payment from the prime contractor to the subcontractor. “Pay when paid” clauses do not allow a prime contractor to avoid an obligation to pay the subcontractor but allow a reasonable time for payment.

REQUIREMENTS

Due to § 779.135(3) prohibiting “pay if paid” clauses, courts will not interpret a “pay when paid” clause to yield the illegal result of making the obligation to pay dependent upon the satisfaction of a condition precedent. Rather, a court will interpret a “pay when paid” clause to require payment within a reasonable time. The “language of a contract establishing the terms of payment does not create or cancel the language of a contract establishing the obligation of payment.”[36]

SCOPE OF DAMAGE RECOVERY

Personal Injury Damages vs. Construction Defect Damages

Wisconsin is a comparative negligence state by which a plaintiff’s contributory negligence only prohibits recovery from a defendant if the amount of negligence attributed to the plaintiff exceeds the amount of negligence attributed to the defendant.[37] Even if Plaintiff’s negligence does not bar recovery, Plaintiff’s damages are diminished in the proportion to the amount of negligence attributed to him or her.[38]

Parties found causally negligent and attributed 51% or more of the total percentage of causal negligence will be held jointly and severally liable for all damages allowed. Parties found causally negligent but attributed less than 51% of the total percentage of causal negligence are only responsible for the percentage of causal negligence attributed to that party.[39]

Parents of injured minor children, minor children of injured parents, surviving spouses, and children or parents in wrongful death actions may be able to recover for loss of consortium or loss of society and companionship. Wisconsin only has damage caps for medical malpractice, personal injury cases, and punitive damages.

In construction defect cases, damages for tort actions are those proximately caused by the negligence or product liability alleged, and defendants are liable for damages if their actions were a substantial factor in causing a plaintiff’s damages. Liability limiting clauses are void as against public policy if they attempt to limit the recovery of a plaintiff in a tort-based construction case. Wis. Stat. § 895.447. Liability limiting clauses may be enforced in contract-based construction cases, however. Wisconsin Pattern Civil Jury Instruction 3700 limits the amount of damages recoverable in a breach of contract action in which a structure’s value was diminished to the lesser of the cost to repair the structure or the diminution in the value of the property.

Attorneys’ Fees Shifting and Limitations on Recovery

Attorneys’ fees are generally not available in construction contract cases unless provided for by the parties. However, they are available under administrative rule ATCP 110 as well as Wis. Stat. § 779.02(5) and Wis. Stat. § 779.16 which relate to consumer protection and theft by contractors.

Consequential Damages

In Wisconsin, the general rule pertaining to the award of damages for defects in the performance of a construction contract is that the party is entitled to what it contracted for.[40] In this regard, Wisconsin applies the “cost-of-correction” rule which requires the contractor to correct the defect or supply what was omitted.[41] As an alternative, if the cost of correcting the defect or supplying the omitted item would result in unreasonable economic waste, then Wisconsin courts will apply the diminished value rule.[42] Economic waste would generally be considered to occur if the cost of correcting the defect is disproportionate to the defect.

Wisconsin Jury Instruction – Civil 3710 specifically allows for recovery of consequential damages. It reads as follows:

The law provides that a person who has been damaged by a breach of contract shall be fairly and reasonably compensated for his or her loss. In determining the damages, if any, you will allow an amount that will reasonably compensate the injured person for all losses that are the natural and probable results of the breach.

In Magestro v. North Star Environmental Construction,[43] the Court rejected the argument that consequential damages are not allowed in a breach of contract action unless the parties specifically contract for such damages. Consequential damages are a permitted type of damages and no specific contract clause is required to provide for the recovery of such damages.  However, the parties may agree to limit or preclude consequential damages in the construction contract.

Delay and Disruption Damages

Delay and disruption occurring in the context of a construction contract provide the basis for the recovery of damages consistent with Wisconsin Jury Instruction – Civil 3710 cited above.

Economic Loss Doctrine

The economic loss doctrine has been the subject of substantial attention by Wisconsin courts. In the case of 1325 North Van Buren LLC v. T-3 Group, Ltd.,[44] the Wisconsin Supreme Court held that the economic loss rule barred tort claims arising out of a contract to renovate a building and turn it into condominiums. In so holding, the Wisconsin Supreme Court overturned the ruling of the Court of Appeals. The Court of Appeals had held that the project owner was not limited to pursuing contract claims in its litigation against a construction manager, and could therefore pursue tort claims for negligence and misrepresentation when the construction manager failed to complete the project on schedule because the construction manager was providing a “service.” In T-3 Group, Ltd., the Wisconsin Supreme Court determined that the contract was not primarily for services, since the purpose of the contract was to provide a condominium complex rather than to provide construction management services. Therefore, the Court concluded the contract was subject to the economic loss doctrine and the owner could only recover contract damages.

The Wisconsin Supreme Court also addressed the economic loss doctrine in the context of a construction contract case in Linden v. Cascade Stone Co..[45] In that case, the Court set forth a number of factors to be used in determining whether a mixed contract for products and services is predominantly a sale of a product (and therefore subject to the economic loss doctrine) or whether it is predominantly a contract for services (and thus beyond the reach of the economic loss doctrine). According to the Court, those factors are: the language of the contract, the nature of the business of the supplier, the intrinsic worth of the materials, the circumstances of the parties, and the primary objective of the contract.[46]

Interest

Prejudgment interest is recoverable at the rate of five percent (5%) per year. Wis. Stat. § 138.04.  Post-judgment interest is recovered at the rate of 1 percent (1%) plus the prime rate in effect on January 1 of the year in which the judgment is entered if the judgment is entered on or before June 30 of that year.  If the judgment is entered after June 30, interest is calculated at 1 per cent plus the prime rate in effect on July 1 of that year.[47]

Whether prejudgment interest is recoverable is a question of law. Prejudgment interest is available when damages are fixed and determinable or may be measured according to a reasonably certain standard.[48]

Punitive Damages

Punitive damages may be recovered in Wisconsin in appropriate cases. In Wischer v. Mitsubishi Heavy Industries America, Inc.[49], also known as the “Miller Park” case, the Wisconsin Supreme Court held that Wisconsin’s punitive damage statute (Wis. Stat. § 895.43(3)) requires a showing that the defendant acted maliciously to the plaintiff or intentionally disregarded the rights of the plaintiff, not that the defendant intended to injure the plaintiff. In Brown v. Maxey[50], the Court held that the term “damages” in insurance policies included punitive damages in Wisconsin.

Liquidated Damages

Wisconsin follows the general rule as expressed in the Restatement (Second) of Contract § 351(1) (1979) with respect to liquidated damages. Liquidated damages provisions will only be enforced if the amount is reasonable in light of the expected or actual loss caused by the breach and the difficulties of proving the loss.

Other Damage Limitations

In wrongful death actions, Wis. Stat. § 895.04(4) limits non-pecuniary damages for loss of society and companionship to $500,000 per occurrence in the case of a deceased minor, and $350,000 in the case of a deceased adult.

CASE LAW AND LEGISLATION UPDATE

In the most recent legislative session, the Wisconsin legislature shortened the statute of repose period under Wis. Stat. § 893.89 from ten to seven years.  2017-2018 Wisc. Legis. Serv. Act 235 (2017 A.B. 773).