Published on:

Tennessee Law: A Contractor’s Right to Recover Amounts in Excess of Monetary Limit of Contractor’s License

In a case involving a breach of a construction contract for a development in Gallatin, Tennessee, a contractor was allowed to recover money for work done, which work substantially exceeded the monetary limit of the contractor’s license. This decision is very significant, and favorable for Tennessee contractors and subcontractors.

The contractor (“Contractor”) submitted a bid to the owner (“Owner”) for over three million dollars. The bid was accepted. Contractor was licensed, but its license had a monetary limit of $750,000.00. At the point Contractor ceased work on the project, it had been paid in excess of $650,000.00. Contractor filed a lien in excess of $625,000.00 for work which it had done, but for which it had not been paid.

Contractor filed suit to enforce its lien and for breach of contract, and violations of the Tennessee Prompt Pay Act. The Contractor’s dispute was not with the Owner, but with a bank (“Bank”) that claimed its deed of trust had priority over Contractor’s lien. The trial court, the Circuit Court for Sumner County, Tennessee, dealt a blow to Contractor by dismissing its lawsuit against the Bank on a summary judgment motion. The trial court held that, since the Contractor had done work exceeding the monetary limit of its contractor’s license, it was “not licensed for the project from its inception.”

Fortunately for Contractor, the Court of Appeals of Tennessee saw things much differently than did the trial judge. It held that the fact that the Contractor had exceeded the monetary limit on its contractor’s license did not result in it being unlicensed nor did it result in Contractor losing its right to a mechanics and materialmens lien.

Keep in mind that the dispute about the Contractor’s lien was not between the Owner and the Contractor, but was between a bank and the Contractor. This is very significant because the court of appeals, in reaching it decision, found it important that the regulations related to contractors licensing, including the regulations regarding monetary limits, were enacted to protect those who contract with contractors. As the court of appeals put it: “the rule restricting an unlicensed contractor’s access to courts does not apply to disputes between contractors and other licensed professionals in the construction industry.”

Any prudent contractor should never bid to do work exceeding its license limit or do work exceeding its license limit. Moreover, a prudent contractor would bear in mind that the decision in this case might not have been the same had the dispute about the Contractor’s lien rights been between the Contractor and the Owner. In such a case, a court might not excuse a contractor from exceeding its license limit.

The case also discusses and analyzes some fundamental breach of contract law which was implicated by the Bank’s argument that the Contractor had agreed to subordinate its lien to the Bank’s deed of trust. The Bank attempted to rely on some emails which Contractor had sent for the position that Contractor had agreed to subordinate its lien. The court of appeals found the language of the emails to amount to nothing more than an agreement to try and agree sometime in the future. Under Tennessee law, and under generally accepted contract law, agreements to agree are not definite enough to make valid contracts.