This blog comes from a webinar that was presented by SunRay Construction Solutions and Alex Barthet. Alex is a board-certified construction lawyer who serves clients in Florida.
On the agenda in this blog is how to deal with the problem of not getting paid on a job. And we will talk about one specific remedy, which is picking up and leaving the job.
Step 1: Define the Problem
Define exactly what the problem is. It sounds pretty simple – you are doing work on a project and you are not getting paid. As the title of this blog says, it may not be what you think about picking up and leaving a job site. And that is because many people who say that they are not getting paid, think that they have the ultimate and unilateral right to stop working.
They are shocked to learn that that is not always the case, because they cannot just pick up and leave. And you should know that you do not have the unfettered right to stop work no matter what your contract says, because you believe Florida law says you have that right.
Step 2: Look at Your Contract Terms
You need to take a careful look at what you agreed to when you signed the contract to perform work on a project.
What does your contract say about stopping?
You should look at what your contract says specifically about the right to stop work. The most commonly seem term that is seen in contracts is between the subcontractor and contractor. But it also exists in contracts between owners and contractors:
Subcontractor shall diligently proceed with the work during any dispute even as it relates to payment or changes. The existence of a dispute shall not be grounds for any failure to perform by Subcontractor.
This means if you sign a contract that says you are going to continue working throughout the course of the dispute, you will follow the dispute resolution process. That means that if you are not getting paid, and your change orders are not being executed, you do not have the legal right to stop work as a potential remedy for the nonpayment.
Your right is that you have to keep working, paying your employees, paying your vendors to have materials delivered to the jobsite, and follow the dispute resolution process that is outlined in the contract. It may be a meeting of the principals, a mediation, and then a litigation in court or arbitration. Again, it is not the ability to stop work.
Is there a valid pay-when-paid provision in your contract?
There is another provision that also creates a problem. For example, let us assume that you are doing work on a project as a subcontractor and you are not getting paid. The contractor tells you to keep working and tells you that the reason you are not getting paid is because they are not getting paid by the owner.
If you have a pay-when-paid provision in your contract, then technically the contractor is not in breach of the contract with you. So it may be hard to believe but if you have signed a contract that says the contractor doesn’t have to pay you until the contractor has been paid, and they actually haven not been paid, then they are not in breach of the contract.
Here are two sample sections of valid and enforceable pay-when-paid provisions so you know what they look like:
- “Payment from the owner is a condition precedent to payment to subcontractor.”
The underlined terms “condition precedent” is the magic language that has in the provision.
- “Payment to subcontractor is contingent upon contractor’s receipt of payment from owner.”
The underlined terms “contingent upon” have to be in the contract.
So, the courts have construed pay-when-paid provisions and when they have determined that if it has the magic language condition precedent or contingent upon, they will be valid. You may be upset that you are not getting paid, but it may in fact rise to the level of a breach of contract on the part of the contractor.
While this will not necessarily help you for a situation that you may currently have pending, in the future, you want to include an affirmative right to work in your contract. So, you can add a stop work provision in the contract. Here is a sample:
Pro tip: “Subcontractor can slow or stop work without liability or penalty if it has not been paid its draw request in 30 days after submission.”
Now you may not be an owner or a contractor to agree to a term like this. Maybe instead of 30 days it is 45 or 90 days. But having the right to stop work if you are not getting paid is very important because it reduces your risk on a job. It may not get you paid, but it least stops the bleeding. So you are encouraged to the extent that you have an ability to negotiate your contracts, in advance of signing them, that you include a right to stop work.
As to the contract, we will close with one last issue. What if your contract says nothing? What if it is a simple purchase order, it does not say that you have to keep working and conversely, it does not say that you have the right to stop. Generally in that situation, the law would suggest that if you have agreed to provide materials or labor to a jobsite in exchange for payment on specific payment terms and if you are not getting paid consistent with those payment terms, then you do have the right to stop work. Because the other side would have materially breached the contract.
To be clear, if you have a contract, – whether oral or a short version of a purchase order – it does not have a pay-when-paid provision and it does not have the right to stop work, or the obligation for you to continue work, and you are not being paid consistent with the terms of your contract, then you likely have the legal right to stop work. That is why looking at the terms of your contract is the most critical first step for you to undertake.
Step 3: Secure Your Lien/Bond Right
Now we will talk about how you can your lien and bond claim rights. If you are going to make a move to stop working and you are owed money, then you need to make sure that your right to get paid is secure. We will go through what those obligations are that you have to comply with in order to timely perfect your construction lien or bond rights.
- Serve a Notice to Owner within 45 days from your first work or delivery of materials on the project. Now if you have a direct contract with owner, you don’t need to send an NTO. But it is still recommended that even if you don’t have a direct contract, that you send it.
- Record the Claim of Lien (or serve your Notice of Nonpayment/Bond Claim) no later than 90 days from your last work or delivery of materials on the project.
- The 90 days is not the same as three months. Some months have more than 30 days and one has less than 30 days. So you need to count the total number of days.
- The 90 days include weekends and holidays, except the 90th day. For example, as you count the 90 days, you are going to count every weekend and legal holiday in between. If the 90th day falls on a Saturday, then you roll it to Sunday, which then rolls to the Monday. If the Monday is a holiday on which your clerk’s office is closed, then it rolls to Tuesday.
- You can always record your construction lien or serve your Notice of Nonpayment before the 90 days and before you finish/while you are finishing the work. This exerts more pressure on the owner or the contractor. So during the course of the job, you can serve a Notice of Nonpayment or record a lien. You don’t have to wait until you are off the job to do that.
- “Last work” does not include punch list or warranty work.
- “Last work” does include approved change order work.
- Those in direct contract with the owner must serve a Contractor's Final Affidavit at least five days before the lawsuit to foreclose on the claim of lien. This affidavit is signed and notarized by you. It lists who the owner is, who you are, how much you are owed, and which parties underneath you are still owed money on the job. That has to be served, not recorded, on the owner at least five days before your file a lawsuit to foreclose on your lien.
- File suit within one year of the recording date of the claim of lien (or one year from last work on a blond claim). There is a slight difference between those two claims so don’t confuse them. You should not be waiting to the end of the deadline if you are going to pursue your legal rights anyways.
Step 4: Check for any guarantees
Check for any guarantees through the following ways:
Who do you owe money to?
If you are going to pick up and leave the job – if you are not getting paid it may not make a difference – you should at least have an understanding of who you owe money to on this job.
Did you guaranty any debt, personally?
Did you personally guaranty a debt? Maybe you have suppliers that are owed money and you have a personal guaranty on that line of credit with the supply house or with a bank. Again, it may not change the decision to stop work, but the important thing is that it shouldn’t come as a surprise later that you may get sued personally by someone that you owe money to.
Did you personally guaranty performance in your contract?
This is not seen very often, but it is seen enough that it should be a concern. For example, an electrician on a project did not provide a payment and performance bond. But in lieu of that, the contractor demanded, and the electrician agreed to personally guaranty performance of the contract.
At the bottom of the contract there was a paragraph where the electrician personally guaranteed the performance of the contract. So be aware that that is a possibility and see if it exists in the contract you have. If so, be careful.
It may not change your decision, but you should know
It may not change your decision about stopping work, but it is important that you understand the obligations you have to other people on this project and your business as a whole.
Step 5: If You Bonded the Job, Talk to Your Surety
Here are some questions you should ask, if you bonded the job:
Did you provide a payment and performance bond?
If you bonded the job, you need to talk to your surety before you leave the job. If you are a contractor, you may provide a payment and performance bond on your projects. You may have provided a payment and performance bond to the contractor and possibly with a dual oblige bond writer to the owner as well. If so, you need to understand what obligations you owe to your surety and what position they may take if you decide to pick up and leave the job.
What are the terms of the bonds?
So the way you have to analyze this is, you have to look at the terms of the bond. Not every bond is the same. There is no uniform bond, every single one is slightly different and has its own notice obligations. You need to understand what those obligations are and see if the owner has complied with them or not.
Did you personally guaranty the bonds?
Did you personally guaranty the issuance of the bonds? You probably did and your spouse may have also had to guaranty the bonds in a document called the General Agreement of Indemnity. That would be the document that you, your partner or spouse may have executed when you got your bond line initially.
Those documents are very one-sides and they are typically non-negotiable and what it does is, it gives the surety the rights to pursue you individually if they suffer a loss. This also applies to threatened loss.
Don’t surprise your surety
You don’t ever want to surprise your surety. Your surety should not find out about the fact that you left the job because they got a bond claim. If you are going to move forward with this conduct - this action to pick up and leave the job – and you bonded the job, you need to talk to your surety and your surety agent in advance of actually doing it.
Again, it may not change your decision to do it, but keeping your surety informed will minimize your risk on the job.
Step 6: Document, Document, Document
Documentation is absolutely critical and ideally, you will not just start documenting on this job when you decide to leave. So before you leave, you should determine the following:
How well have you documented issues on the site?
You should determine how well you have documented a job from the very beginning. You should do this through:
- Emails - Check what the emails say.
- Pictures – Do the pictures support your position that you were not at fault for the delays or issues on the job, or the reason for nonpayment.
- Videos – Have you taken any videos?
Ensure that you have access to all these emails, pictures, and videos. They should also be backed up. It is possible for a case to fizzle out just because the vast majority of documentation was lost because they were either hacked or a hard drive crashed. Have a robust backup strategy in your office for your data to make sure that if you need to resurrect information, that you have the ability to do it.
What do the meeting minutes say?
Something that is often overlooked, is meeting minutes. Meeting minutes are not usually written by you, and you and your team may not normally or routinely review it. But do the meeting minutes support your narrative of what has happened on the job? I would suggest to you that they may not, and even you may not know it. So for example, you attend the weekly or bi-weekly meetings and are constantly complaining that issues are holding you back, that the job is delayed because of other people and you can’t get your folks onto the job site.
Whatever it is that you are complaining about, are those issues properly reflected in the meeting minutes. Because if they are not, fast forward a year and in a legal fight, the judge or jury will be looking at different things. If you say that in one of the meetings you were complaining about these issues but there is nothing in writing to support it, you will find yourself in trouble.
If you get meeting minutes if there are meetings, do the meetings minutes support your position? If they do not, you need to send an email following your receipt of the minutes. If you are not getting a copy of these minutes, you need to request them and assert your position. An email of what you said and the position of the other parties in the meeting is fine.
Comply with all notice provisions in your contract
Finally, what does your contract say about notices. Have you complied with the notice provisions in your contract? You typically have a certain amount of time to assert claims and to provide notice and opportunity to cure. Any specific documents that are required may need to be sent to a specific person or address via certified mail.
Check that you have complied with all those provisions. It would be a shame if you had done everything right but a court determined later that your contract required that a certain notice be sent within seven days and it had to go via certified mail, and you didn’t do it. You may have jeopardized your legal position for something so small.
Don’t take those issues for granted because a court or jury may find those issues to be significant enough that it could impact your legal rights.
Step:7 Get ready for the fight
And now finally, we have getting ready for the fight. Here is how you should prepare yourself:
Stopping work should be avoided
Stopping work and demobilizing is a very drastic move. If you can financially avoid stopping work, you should try to.
Be ready for exorbitant back charges
The main reason is because you give the owner or contractor almost a blank check to finish the job and back charge you significantly.
For example, there was an electrician who was terminated from a job over nonpayment and a dispute over what was happening. It was a two-million-dollar job for the electrical scope of work. And as a result, the contractor made a claim on the electrician’s performance bond and didn’t pay him about $4000 worth of work that had already been performed between the amount left to complete the job in the contract, plus the $400,000 they didn’t pay him, and the claims on the performance bond.
The contractor had ample funds to finish this job with someone else. All the work was being tracked and they were paying nearly 2-3 times what the electrician was paying for labor. Materials were also being purchased as needed rather than on order, so they were more expensive. But the contractor did not care because they had ample funds to finish the job using the money in the contract from the contractor.
So be careful about picking up and leaving because it creates this significant back charge issue that can potentially come back and bite you.
Consult with experience legal counsel first
It is very important that you consult with an experienced legal counsel first. Do not wait until after you leave. With the previous example, the electrician was terminated, but he should have sought counsel much earlier, so don’t delay in getting an experienced attorney in construction to help you.
Get ready for a legal fight
If you are going to move down this path, you need to make sure that you are prepared for what it to come. And again, if you meet with an experienced construction attorney, they will be able to lay out for you, exactly what is ahead. So you can go into it with your eyes open.