Ask Wallace Jordan: Construction Contracts—Payment and Non-Payment

By Clark R. Hammond

A clear, comprehensive, and unambiguous contract is vitally important for contractors and subcontractors engaged in the business of construction to negotiate and execute.

 

There is a lot on the line in large, expensive (and lucrative) projects. Schedules for completion of work, payment, licensing requirements, conditions related to potential delays, remedies for damages—it’s all in play, and critical to defining success.

 

How you negotiate your contracts now will determine how you resolve any legal issues that arise later.

 

Here, we answer some important questions related to setting final payment terms under your contracts, and how you can seek remedies for non-payment by the other party.

 

(This list is not exhaustive. For more information, reach out to one of our construction attorneys.)

 

PAYMENT                                        

QUESTION

How should “completion” be defined under the contract to trigger final payment?

ANSWER

This is a key one, as this language is often the subject of disputes litigated between the contracting parties.

Be sure the contract states precisely when payment comes due. Include all conditions precedent that will permit any non-payment or withholdings. Otherwise, Alabama law generally does not construe reasons for non-payment subject to provisions in the absence of explicit procedure under the contract, such as pay-if paid provisions.  Compare Federal Insurance Company, et al. v. I. Kruger, Inc., 829 So.2d 732 (Ala. 2002) (no condition predecent) with Lemoine Co. of Alabama L.L.C. v. HLH Constructors, Inc., 62 So. 3d 1020 (Ala. 2010) (explicit contractual provision).

QUESTION

As a subcontractor, I need to know: What condition, if any, dictates how and when I will be paid?

Answer

Contracts between contractors and subcontractors often include either a “paid when paid” clause or a “paid if paid” clause to govern the timing of payments made to the subcontractor. As the language suggests, these provisions allow for two possibilities— the timing of the payments from the owner , or no payment at all if the contractor never gets paid. Thus, in any negotiation, it is critical for the subcontractor to understand if the contractor has transferred the risk of non-payment by the owner to the subcontractor or merely agreed that the timing of the payment may be temporarily impacted.   

QUESTION

What is “prompt payment” under Alabama law?

While parties can set specific payment terms and deadlines, in the absence of specifics under the contract that transfers the risk of nonpayment by the owner to the subcontractor, Alabama mandates the following: for both private and public payors See, Ala Code 8-29-1 et al (1975) (private projects) and Ala. Code 41-16-3 (1975) (public projects):

  • Payment to contractors must be paid to a contractor within 30 days from a payment request
  • Payment to a subcontractor from a contractor must be paid within 7 days from when payment from an owner is received by the contractor

For private parties, retainage cannot exceed 10 percent, and after 50 percent of the work is completed, there can be no further retainage. If the payor is a governmental entity, then retainage cannot exceed the amount due to be paid, assuming no provision in the contract stating otherwise.

Contractors seeking to dispute prompt payment requests must provide written notice to the other party within 5 days of receiving the request. Owners have 15 days to dispute a request for payment from a contractor; that owner dispute must also be in writing.

Additionally, contractors seeking the recovery of delayed payments from private parties can recover 12 percent interest and attorney’s fees, but can only recover the legal amount of interest charged by the state under public prompt payment law, but not attorney’s fees under the statute.

NON-PAYMENT

QUESTION

How much time do I have to file a lawsuit for breach of contract if I don’t get paid?

ANSWER

The statute of limitations to bring suit for breach of contract generally under Alabama law is 6 years from the time the breach is identified. This would govern suits for non-payment.

QUESTION

What type of mechanic’s lien should I file in case I want to pursue that avenue?

ANSWER

This depends on the situation or nature of the relationship.

All contractors and subcontractors may pursue an “unpaid balance” lien to enforce collection from an owner on monies owed after successful completion of work. Alabama Code § 35-11-210. Although an unpaid balance lien is a possible remedy, payment is by no means guaranteed because the owner may have already paid the contractor in full or be claiming a problem excuses further payment to the contractor.

The same statute contemplates another type often, known as a “full price” lien. Under this option, if the person, firm or corporation, before furnishing any material, shall notify the owner or his agent in writing that certain specified material will be furnished by him to the contractor or subcontractor for use in the building or improvements on the land of the owner or proprietor at certain specified prices, unless the owner or proprietor or his agent objects thereto, the furnisher of such material shall have the lien for the full price thereof. . . .Two critical issues: (1) notice to the owner or its agent in writing BEFORE the materials are furnished and (2) no objection by the owner to the notice.

The “full price” lien is based on the existence of either an express or implied contract of the owner to pay for materials, Richard v. Little, 96 So. 114 (Ala. 1923). The contract need not be in writing. Sherrod v. Crane Co., 182 So. 48 (ala. 1938). The contract may be implied from the owner’s silence following receipt of notice from the materialman, Buettnerbros. v. Good Hope Missionary Church, 18 So.2d 75 (Ala. 1944). The statute appears to make the “full price” lien by advance notice available only to materialmen and not to those applying labor and services, Crane Co. v. Sheraton Apartments, Inc., 58 So.2d at 616 (Ala. 1952).

 

QUESTION

What is a surety bond, and how does it work?

A contractor may in some private projects and must in public works projects acquires a performance and/or payment bond prior to the performance work under a contract. In a surety arrangement, a contractor or subcontractor secures a bond from an issuer, known as a surety. If that contractor or subcontractor breaches the contract by failing to pay subcontractors or suppliers or fails to perform to specification, the surety may then be called on to compensates the other party for the loss by payment, or in the case of a performance bond, agree to  complete the unfinished work.

The aggrieved party must file a claim with the surety to begin the process of collecting on the applicable bond. These can become complicated disputes that take years to resolve, especially if the project owner is the State of Alabama or the federal government (see the federal Miller Act and Alabama’s “Little Miller Act”).

Be sure to research the law and procedures concerning performance and payment bonds should you be required to acquire such bonds or work on a project where bonds have been required.

QUESTION

What venue should I specify to resolve disputes under the contract in a court proceeding? Should I choose an alternative route such as arbitration or mediation?

ANSWER

This is a critical question to decide upon before you execute any contract. It is not an easy one to answer.

For instance, would it be cheaper, quicker or easier to seek a ruling from an arbitrator over a judge or jury, or is it advisable to seek to resolve issues through mediation before filing suit or demanding arbitration? Would it be wiser to seek arbitration with individuals who are familiar with construction?  What if the other party to the contract place of business is in the county where a dispute would be tried in court before local jurors or a local judge? Is there a concern about local bias? Can you expect legal  fees to be less under one scenario versus another?

As with most matters, the amount of legal fees and the outcome of a despite with by arbitration, or court proceeding will boil down to the facts of your case and the presentation to the persons deciding the issue; however, some contractors are not in favor of arbitration while others would not have any other method for deciding a dispute. This is an important topic to be discussed with your legal counsel when drafting the contract

Some court dockets have jammed up during the pandemic, meaning this could become an even more critical and complicated analysis.

No representation is made that the quality of the legal services to be performed is greater than the quality of legal services to be performed by other lawyers.

CTA: Have other questions related to your contracts? Contact Wallace Jordan today?