The best way to avoid payment issues is to negotiate the payment terms and conditions of the contract, as well as the remedies of the parties from the beginning. But of course, unfortunately, there are times a general contractor (“GC”) is slow to pay or fails to pay its subcontractors. If you are a subcontractor who is or has experienced this issue, you need to read/re-read your contract as soon as the issue presents itself.
Your initial questions should be:
- Does the GC contractor have grounds to withhold payment?
- Does your contract permit you to stop work?
- What can you do to ensure payment from the GC?
GC Grounds to Withhold Payment
Generally, the permitted grounds for a GC to withhold payment to a subcontractor are usually set forth in the subcontract. Grounds may include the following:
- Defective work: GC is usually required to provide you with notice and an opportunity to cure defective work.
- Non-compliance with scope & time of work: The failure to perform your work in accordance with the contract and schedule.
- Non-payment to sub-subcontractors: Your failure to make payments to sub-subcontractors/vendors/suppliers.
- Pay-if-paid clause when the GC is not required to pay you for work performed unless the owner pays the GC first.
If the GC is legitimately relying on any of the above grounds to withhold payment, most subcontracts provide that the GC must provide written notice. Such notice gives you an opportunity to cure or at minimum, meet with the GC to determine the best course before you start exercising your options, i.e. stopping work or prioritizing other projects. However, if the GC does not have grounds to withhold payment, the GC may be in breach of the subcontract.
It is always a difficult and often costly decision to stop work. But if you are not getting paid and have expenses of your own, there will come a time when you may need to or are forced to stop work. You need to be cautious when you are at such a crossroads. While generally, it seems obvious that if the GC is not paying, you are not working. However, you need to carefully review the subcontract to determine whether you have the right to suspend or stop work after a certain period of non-payment. You will typically need to provide written notice with a deadline for the GC to make payment before you stop work. The key point here is that, generally, you must follow any procedures in the subcontract before you stop work.
If the subcontract does not contain a provision authorizing you to stop work and the GC withholds payment without proper grounds per in the subcontract, the GC will likely be in breach of the subcontract. Again, generally, you should provide notice and an opportunity for the GC to pay, but you may have the right to stop work or terminate the subcontract if the GC does not make payment.
More Importantly, How Can You Get Paid?
Dispute Resolution (Mediation and/or Arbitration)
Again, re-read your subcontract to determine if it contains a section about dispute resolution (which generally is mediation and/or arbitration clause. It is extremely common and good practice to include a pre-suit or pre-arbitration mediation provision in almost all contracts.
Mediation is an informal, private settlement process. Generally, the parties agree to use a third-party to conduct a meeting (not a hearing) where the parties, either together in one room or apart in separate rooms, communicate to attempt to resolve all claims between them this can be an attorney specializing in construction law. Mediation is fairly simple and can be more cost-effective than any of the next options.
Arbitration involves a more formal process. It is a private, legal determination of a dispute, by an impartial third-party or panel of third parties. Arbitration hearings are similar to bench trials, without a jury where a party’s right to appeal an arbitrator’s decision is extremely limited. Generally, an arbitrator’s decision is final and binding on the parties. Usually, you have no further right to commence a lawsuit after arbitration.
If your subcontract does not include a mediation/arbitration clause, you can still ask the GC to attend mediation, but if the GC will not agree to do so, you may file a lawsuit against the GC and possibly the owner of the project.
A mechanic’s lien is a legal claim against the real property where the work was completed, which attaches to the owner’s legal interest in that real property. In Texas, there are very strict statutory requirements and deadlines that must be followed for a lien to be valid, also referred to as “perfecting” your lien. It is best to consult an attorney before you file a lien because the detailed procedures to perfect a lien under the Texas Property Code are outside the scope of this blog. But generally, while a properly perfected lien secures your right to payment and may force a GC to make payment if the GC does not pay you after the lien is recorded, you may ultimately have to file a lawsuit to get paid.
The owner of the construction project may require the GC to furnish a payment bond for protection of the real property against all claims of liens. The detailed procedure on how to properly perfect a bond claim is outside the scope of this blog. But generally, if you bring a claim on the GC’s payment bond you must comply with the specific notice requirements stated in the Texas Property Code. If you need help with a bond claim or any of the remedies for obtaining payment, please call our office at 972-434-8009, we would be happy to help you.