Suspending Work for Non-Payment May be a Legally Protected Right Where the Subcontractor Can Obtain Interest, Time and Save Unnecessary Costs
Today’s contribution is authored by Karen A. Palecek and James J. Palecek
What do you do when you are on a project and the monthly progress payment is late? In many states and under certain contracts, there is a temporary remedy that may be available to a subcontractor that cannot only expedite payment, but reduce costs and compensate a subcontractor when a contractor does not pay the progress payment, even though they have been paid. It is important to know the contractual rights and what state law may apply in a situation where there has been a delayed monthly progress payment. Every situation is not necessarily a material breach that would allow termination, so it is important for the subcontractor to immediately evaluate what the possible remedies are and how it may impact the action options that may be available. A suspension may be more appropriate if the reasons for the non-payment can be cured following a suspension payment and resumption of work that could ultimately mutually benefit all parties.
The suspension could include several aspects, whether it involved just reducing the crew size or a complete demobilization depending on the seriousness of the non- payment and the particular provisions of the subcontract agreement and state laws that may apply.
It is very important before suspending work or even threatening to suspend work, to obtain the advice of experienced construction counsel to evaluate the benefits and risks of suspension.
Be Aware of the State Statutory Law Involving Prompt Payment
Many states have enacted prompt payment laws for public and private construction projects. It is important for subcontractors to familiarize themselves with the applicable laws where they are performing the work and depending on whether it is public or private, the suspension possibilities may be different. For example, in Arizona on private construction projects, Arizona has adopted Arizona’s Prompt Payment Act and under A.R.S.§32-1129.04 provides that a contractor may suspend performance if the owner fails to pay the contractor and a subcontractor may suspend performance if the owner fails to pay the contractor and the contractor fails to pay the subcontractor. In addition, if the owner pays the contractor for the subcontractor’s work, but the contractor fails to pay, the subcontractor has a remedy as well. Inaddition, the statute addresses situations when the pay application is submitted, there may be a proper basis to withhold the fund and, thus, this must be evaluated by the subcontractor.
Arizona’s statute specifically provides that the subcontractor will not be in breach of contract for suspending performance pursuant to the statute and that once the suspension occurs; they are not required to resume work until the amount that has been certified and approved is paid, along with the costs incurred for remobilization resulting from the suspension.
Other states’ laws definitely vary in terms of the specifics with regard to the ability to suspend work.
Check the Specific Subcontract Language for Any Rights to Suspend Work
Some subcontract agreements contain a provision that gives a subcontractor the right to suspend work for non-payment. Specifically, the ConsensusDocs Form 200 Agreement and General Conditions Between Owner and Contractor (Lump Sum) (Copyright 2011, revised 2014) specifically provides that if there is no fault of the constructor that the constructor that has not received a progress payment from the owner within seven days after the payment is due, upon giving a seven- day written notice to an owner, and without prejudice to or in addition to any legal remedies, may stop work until payment of the full amount owing the constructor has been received. It provides for interest for late payment. In addition, it discusses the contract price and contract time, which should be equitably adjusted by change order for reasonable cost and delay resulting from the shut-down. See section 9.5.
The ConsensusDocs Form 750 Standard Agreement Between Constructor and Subcontractor also identifies that if a constructor has not received payment from the owner and does not make payment to the subcontractor for any reason not the fault of the subcontractor, or if the constructor has failed to pay the subcontractor within a reasonable time, the subcontractor may, after giving seven days written notice, stop work until payment of the full amount owing the subcontractor has been made. See Section 8.2.6.
The ConsensusDocs Form 750 also provides for the subcontractor costs related to the suspension. See 8.2.6.
It is important to verify the contract language and statutory language because if the construction subcontract agreement does not have a suspension of work provision and the state does not have such a statute, a suspension of work would be considered a material breach by the subcontractor.
Documenting and Communicating the Delays in Payment Are a Must
If the subcontract agreement and the state law have remedies allowing for suspension for non-payment, it is still very, very important to investigate the reasons for non-payment, send timely communications stating that payment has not yet been received, what is the basis for the non- payment, e-mails should also be sent as a supplemental. Writing to the appropriate contractor representative and identifying the specific billing or monthly payment that has not been paid is critical for documentation to support the suspension.
In addition, if the procedures are followed in terms of communication and then a suspension does occur, it will be very important for the subcontractor to document the costs associated with the suspension and the timing of the suspension so interest and remobilization costs can be recovered.
Seek Legal Advice Regarding Any Suspension for Non-Payment
Given the risks associated with the suspension and the necessary evaluation process, the subcontractor should seek advice from competent, knowledgeable construction counsel before undertaking the suspension.
In addition, if the subcontractor wants counsel to just review the facts and the letter prepared for the suspension, it needs to provide counsel with all of the facts. Counsel should then be able to evaluate and advise as to the most prudent course of action.
About the Authors
Karen A. Palecek is a co-managing member of Palecek & Palecek PLLC where she has more than 26 years of experience in the areas of construction law and litigation. Her clientele includes specialty trade contractors, suppliers, general contractors, and owners. Her practice and experience is focused on every aspect of the construction industry including but not limited to contract review and negotiation, mechanic’s liens, bond claims, arbitration, mediation, bench trials, jury trials, payment and performance issues, claim evaluations, litigation from complaint through to collection on judgments and appeals.
James J. Palecek is a co-managing member of Palecek & Palecek, PLLC. He has advised construction and other corporate clients for over 18 years. His clientele includes suppliers, subcontractors, general contractors, developers, and consultants in both the commercial and residential construction arenas and in both the public and private sector. In addition to a focus in construction law, he has also led the ﬁrm’s corporate transactional and real estate practice areas for the last 10 years. They can be reached at (602) 522-2454 or email@example.com.