Stopping Work for Non-Payment

In contracts between owners and contractors or between prime contractors and subcontractors delays in payment are frequently a concern. In some jurisdictions, and for specific industries such as construction,a contractor or subcontractor may want to include the right by statute to stop or suspend work if they have not been paid. In jurisdictions where those types of statutes do not exist, the right to stop work for non-payment needs to be included within the agreement. Not paying on time may be a breach of the contract, but in most cases it would be considered a minor breach where only money damages could be claimed unless the delay is unreasonable. As a result a contractor or subcontractor could wind up continuing to invest more in the work and risk having to sue the breaching party to collect the money and damages. Many prime contractors have tried to implement “pay when paid” provisions so they don’t have to pay a subcontractor until the prime contractor receives payment from the buyer (see separate post on “Pay when paid”). That doesn’t do much to protect the subcontractor.

If I were the subcontractor I would want several things to protect me against the unethical owner or prime contractor. First, I would want to be paid interest on late payments so I’m not providing free financing to either the owner or prime contractor. Second, to deal with the issue of disputed amounts invoiced, I would want language in the agreement that in the event of a dispute in the amount of the payment, the other party may withhold only the reasonable value of the actual amount under dispute. That way they cannot withhold payment of an entire invoice. Third, I would want the right to stop work if any undisputed payment was more than thirty days late. Fourth if the work is stopped I would want to be paid any additional costs to start up the work and have the work be extended day for day for each day it was stopped for non-payment. Last, I would want the right to be able to terminate the agreement for cause if payment was more than sixty days late.

From a procedural standpoint I would add a concept that is frequently used in governmental contracts but seldom used in commercial contracts which is a show cause notice. No one likes to be surprised, and simply stopping the work without any advance notice would be just that. A show cause notice is similar to a cure notice and would provide the facts, remind them of your contract rights, and ask them to provide you with a reason why you shouldn’t exercise your rights. For example,

Invoice number 1234 was submitted for payment on October 1, 2012. In accordance with the terms of the contract EXCO was required to make payment on November 1, 2012. That payment was not received. Invoice 1234 remains unpaid as of the date of this notice. In accordance with Section 9.1.5 of the contract, in the event of payment is more than thirty days late (December 1,2012, SUBCO has the right to stop work for non-payment. This notice is to remind you of your payment obligation and put you on notice of our right to stop work if payment is not made by December 1, 2012. Please show cause why work should not be stopped if payment is not made by that date.

If you were not paid you could both stop the work and send a cure notice that they have breach the agreement for non-payment and the other party would have the cure period in which to correct the breach or be terminated and be subject to damages.

The unethical owner or prime contractor may not want to agree to this as it would take away their ability make money at the expense of their contractor or subcontractors. If an owner or prime contractor is ethical, agreeing to this language places no additional burden on them. They would already pay when they are obligated to pay.