By: Joseph Rust
Speak with any subcontractor, and they will have undoubtedly encountered the following scenario: having not been paid by a general contractor for the work performed. So, should an unpaid subcontractor walk off the job before the project is complete? Speak with an experienced construction lawyer, and the answer will undoubtedly be a strong, “maybe”.
Although more often than not general contractors and subcontractors work under ongoing oral agreements, subcontractors should insist on having direct written contracts with the general contractor. Having a written contract ensures that the general contractor is bound by the terms of the agreement they sign. This provides the subcontractor more readily available remedies should disputes regarding the general contractor being slow to pay arise.
The agreement drawn up between the general contractor and subcontractor should outline the rights, obligations and duties of both parties. The parties should focus primarily on the scope of work to be performed, the deadlines for the subcontractor’s performance, and the payment schedule provided by the general contractor. If a subcontractor feels that the general contractor has violated the terms of the payment schedule in the agreement, the subcontractor is entitled to sue for damages. However, as originally posited, if the general contractor fails to pay pursuant to the payment schedule before the subcontractor completes its performance, should a subcontractor walk off the job site?
The issue likely becomes whether or not, in the eyes of a judge, non-payment was a material breach of the contract between the general contractor and subcontractor. A material breach is a party’s failure to perform a major part of the contract. Or seen another way, a material breach is so substantial that it prevents the contract from being completed or defeats the purpose of the contract. If non-payment by the general contractor would be deemed a material breach of the contract, then the subcontractor would be relieved or excused from its performance under the contract.
One risk a subcontractor faces if it walks off the job for non-payment prior to completing its performance, is it may take up to another year before the case comes before a judge to determine if the subcontractor was justified or excused from its performance in the first place. If the judge determines, non-payment was not a material breach of the contract, the subcontractor may have opened themselves up to serious liability for its failure to complete its performance from the general contractor.
Filing a mechanic’s lien may likely be the best option available to a subcontractor. The mechanic’s lien creates a security interest in the property for the unpaid portion of the contract. And the unpaid subcontractor can file a foreclosure suit on the property to enforce the lien and secure payment.
The filing rules for mechanic’s liens are very specific. All residential subcontractors working under a general contractor must post a Preliminary Notice to the Mechanic’s Notice and Lien Registry (“MNLR”) to preserve their lien rights. If the subcontractor fails to post a preliminary notice with the Secretary of State before final payment is made on the project then the subcontractor will forfeit the opportunity to perfect the lien. We recommend you consult with an attorney prior to filing any mechanic’s lien, and further recommend speaking with an attorney if you remain an unpaid subcontractor.