Article originally appeared on thelienzone.com
In this article, we will discuss in detail the answer to one of the most common questions we receive in our construction law firm, if I’m not getting paid, can I stop working, and if I do, how do I get paid? To determine whether or not to stop working if you are not getting paid, you need to consider the following.
- What does your contract say about stopping work?
- What is the status of the work and the payments on the job at the time you want to stop working?
- Does your contract have a pay-when-paid provision?
- Do you have lien or bond rights?
- Are you ready to take the plunge and suffer the possible adverse consequences?
What does your contract say about stopping work?
Your contract may just be a handshake, a purchase order or a simple one-page agreement, so it probably says nothing about stopping work. Work stoppage provisions are most often found in those longer and more significant contracts usually on larger jobs. Most sophisticated contracts address work stoppage as a specific issue as seen in the sample below.
“In the event of a dispute as to whether any item or portion of the work is within the scope of the work to be performed by Subcontractor or any dispute as to whether Subcontractor is entitled to an extra payment or additional time, Subcontractor shall continue to proceed diligently with the performance of the work, this subcontract and any disputed work, pending any resolution. The existence of a dispute shall not be grounds for any failure to perform by subcontractor.”
This means that if you sign a contract with this language, you have agreed in advance that you’re going to follow the dispute resolution process that exists in the contract and that stopping work is actually not available to you as an option. You need to look out for this when you are negotiating your contract. According to such a provision, you need to keep working even though you may not be getting paid. You cannot stop work even in a situation where you have to undertake mediation or arbitration or maybe even file a lawsuit to resolve the dispute.
If you don’t have a written agreement, or your agreement doesn’t explicitly prevent you from stopping work, you may be able to stop work. This doesn’t mean you absolutely can stop working if you don’t have this provision. It just means that your analysis can continue to determine whether or not it’s the best thing for you. Let’s take a quick look at a provision you can include in your contract as you negotiate your contracts in the future so that you have the explicit right to stop work. This is called a “stop work” provision. It would not necessarily exist in a contract given to you. It would more likely be something that you would have to add to your contract.
“Subcontractor can slow or stop work, without liability or penalty, if it has not been paid its draw request 30 days after submission.”
While this provision doesn’t give you the immediate right to be paid, it stops the bleeding so that you don’t have to work if you’re not getting paid. As you review and negotiate contracts in the future, consider adding a provision like this so that you can stop working if you’re not getting paid.
What is the status of work and payment on the job at the time you want to stop working?
Most of the time, when clients come to us, they’re owed money and want to stop work. However, it’s possible that they may want to stop work because of other reasons. For instance, they may fear that they will not be getting the rest of their money. Or maybe the job is just taking too long, and you don’t want to continue the work.
But ask yourself, have you been paid for labor or materials that you haven’t yet furnished. When you analyze the payments made on the job, have you received more money than the labor or materials provided to the project? Where this comes into play most often is when you have received deposits for materials that may remain on order.
Maybe you are a windows subcontractor, and you’ve received fifty percent down payment for the windows, but the job turns sour and you don’t finish your work. In this scenario, you’ve effectively been overpaid because you haven’t yet provided the windows. So if you decide that you want to stop working in this scenario, you need to account for this overage.
What about your subs and suppliers, do you owe them money? If you stop working, what’s going to happen to them? Are they going to be coming after you to get paid? Your subs and suppliers may have lien and bond rights, making you responsible for their payment. Ideally, your subs and your suppliers should be lined up with you as you make your case against the owner or general contractor.
Read next: Get Paid Faster
Have you given any personal guarantees to your subs and suppliers? Part of the analysis of determining whether or not you should stop work is understanding the risks associated with you stopping work. It may be worse for you to stop working than it is to continue to try to finish the job and get paid. If you have personal guarantees with your suppliers and you’re not getting paid after you stopped working, your suppliers will be coming after you personally.
Do you have a bond on the job? You may have given your own payment and performance bond to the contractor and owner, especially on larger jobs. If you stop work in such a case, your surety may receive notice from the contractor making a claim on your performance bond. That may impact you significantly on other jobs. A performance bond claim on your surety is something that should not be undertaken lightly.
Does your contract have a pay-when-paid provision?
The next thing you need to look at is whether or not your contract has a pay-when-paid provision. Are you not getting paid by the contractor because the contractor hasn’t been paid by the owner? If that’s the case, do you have a pay-when-paid provision in your contract? More likely than not, you do. These days most contracts do. The next question is, is it a valid and enforceable pay-when-paid provision? That analysis comes down to determining whether or not the pay-when-paid provision has the right language. Here is one example:
‘Payment from the owner is a condition precedent to payment to subcontractor.’
The highlighted words ‘condition precedent’ are what make this provision enforceable.
Another example is:
‘Payment to subcontractor is contingent upon contractor receipt of payment from the owner.’
Here, this provision is likely unenforceable.
Understanding whether or not you have an enforceable pay-when-pay provision is important because you may have no legal right to stop working. Doing so in the face of an enforceable pay-when-paid provision will constitute a breach of your contract.
Do you have lien or bond rights?
As you may know, a construction lien is a legal right available to those that provide labor and materials to a project. It essentially gives you the ability to sell the property upon foreclosing your lien. Any equity from that property is going to be used by the court, if you prevail, to pay the unpaid lienor. For instance, if you are a subcontractor or supplier on a project, and you record a lien and prevail, the property will be sold. At the sale, all that equity (if there is a mortgage on the property, it would be paid first) would go to pay you and any other lienor that asserted a claim, and whose claim has been determined to be valid.
You may also have rights against the contractor’s payment bond. Payment bond is similar to your rights under a lien except instead of the property that is being encumbered, it is the contractor’s payment bond surety.
Are you ready to take the plunge and walk off the Job?
You should consult with a construction attorney first before walking off a job. A construction attorney can review the pros and cons associated with walking off the job. While we have been going over generalities in this article, remember every contract is different and every situation unique. You don’t want to find yourself in a worse place because you decided to walk off the job. So, consult with a construction attorney first to understand the risks and benefits of walking off.
Once you decide that you’re going to do it, use the opportunity before you walk off the job ( as you may not get access back to the site) to document what is happening on that site. What are the things holding you up on that job? Document them. Take lots of pictures, videos, and send written notices or even emails to necessary parties. Don’t wait till the last moment. Ensure that the documentation has been progressing through the course of the job so that you can tell a story of what happened on the job and why things outside of your control were negatively impacting your ability to do your work.
Remember that part of protecting your rights to get paid is building your case during the course of construction. Send regular notices, pictures, and emails to the contractor, subcontractor, or the owner indicating what’s happening on the job. If you wait until the very end, it looks like you’re just complaining. But if you do it over a longer period of time, you can tell a much better and more convincing story.
If you are the bonded contractor, you need to make sure that you notify your surety before you walk off the job. This is because one of the things that will likely occur is that your surety will receive a notice from the contractor or the owner. Let them know that you’ve spoken with a lawyer that you’ve documented the issues on the job, and that it’s in your best interest to walk off. This should be done so that you can get their support and that there are no surprises.
If you decide to pull the plug, get ready for the fallout because things will very likely become more complicated. In many instances, it’s a game of chicken – who’s going to crack first. A better understanding of all your options and possible consequences will surely make you better prepared.