DOES A CONTRACTOR HAVE THE RIGHT TO STOP WORK BECAUSE OF LACK OF PAYMENT IN MASSACHUSETTS?

By Attorney Jonathan Sauer

One of the more difficult decisions that has to be made in the legal context of construction is whether or not a contractor can (should) pull off the job due to lack of payment by its contracting party. The following article is primarily within a subcontractor- general contractor context, although various points are discussed within the context of a general contractor-owner relationship.

It is an assumption common in the contractor’s way of thinking that ‘hey, if I am not getting paid, I am outta here!’ A similar belief is that if one delivers materials, even installs them at the job, and doesn’t get paid, the contractor/supplier has the right to go to the job and remove those materials (and the labor which installed them). Since a lot of police departments might consider that to be theft - a crime - this really ought to be studied hard before taking such action, as generally title to goods is transferred to the contracting party/owner upon delivery and installation. (An exception might be if the materials were purely kept in a locked space - trailer - under the direct control of the contractor.)

The problem of independent covenants

Similarly, stopping work due to lack of payment can actually be a breach of contract.

This is because under pure (is there such a thing?) contract law, the obligation to perform on one party’s standpoint is seen to be an independent obligation from that of the other party to pay for those services. Put in a little more legalese, the law considers these obligations as being independent covenants, which are separate and distinct from each other. Meaning that the fact that one party doesn’t do what he/she/it is supposed to - such as pay in accordance with contract terms - may provide little or no justification on the other party’s part to refrain from performing the terms and conditions of its own independent covenants.

As stated by the Court in In re J.A.G., Inc. 7 B.R. 624, 626 (Bkrtcy.D.Mass., 1980):

“ Massachusetts law is clear. The tenant in a non-residential lease has the obligation to pay the rent as specified. This obligation is considered an independent covenant, so that the tenant has no right to withhold rent because of some breach by the landlord. Malden Knitting Mills v. U.S. Rubber Co., 301 Mass. 229, 16 N.E.2d 707 (1938); Barry v. Frankini, 287 Mass. 196, 191 N.E. 651 (1934); P. J. W. Moodie Lumber Corp. v. A. W. Banister Co., 286 Mass. 424, 426, 190 N.E. 727 (1934).”

Now, subsequent Massachusetts court decisions have excepted both residential and commercial leases from this rule. Others criticize the independent covenant rule as being arcane and more appropriate in an earlier, rural society. Still, the rule otherwise seems to have some viability in some contractual contexts.

The problem of having to prove substantial performance of the subcontract

What is the significance of that? For one thing, leaving a job due to payment issues can be considered a breach of contract - abandonment or worse. And, having breached the contract, chasing down the remaining money owed can be problematic because of certain provisions in the law.

Massachusetts law is clear that only contractees - being those who are parties to a contract - fully performing their contracts having standing to sue to collect under their contracts.

This legal principle is referenced in the case of Handy v. Bliss, 204 Mass. 513 518-519, 90 N.E. 864 (1910). As stated by the Court, the general principles in construction cases are:

“To entitle the plaintiff to recover in a case of this kind there must be an honest intention to perform the contract and an attempt to perform it. There must be such an approximation to complete performance that the owner obtains substantially what was called for by the contract, although it may not be the same in every particular, and although there may be omissions and imperfections on account of which there should be a deduction from the contract price. It is not necessary that the work should be complete in all material respects, nor that there should be no omissions of work that cannot be done by the owner except at great expense or with great risk to the building. There may be omissions of that which could not afterwards be supplied exactly as called for by the contract without taking down the building to its foundations, and at the same time the omission may not affect the value of the building for use or otherwise, except so slightly as to be hardly appreciable. Notwithstanding such an omission, there might be a substantial performance of the contract.”

In the absence of special exculpating circumstances, an intentional departure from the precise requirements of a building contract is not consistent with good faith endeavor to perform fully, and bars all recovery unless it is so trifling as to fall within the rule “de minimis”. Andre v. Maguire, 305 Mass. 515 (1940). Generally, a party to a contract who intentionally departs from its terms will be denied recovery under the contract. Chaplain v. Dugas, 323 Mass. 91. (1948) A building contractor who intentionally failed to perform his contract in the important matter of a steel I-beam, but who substituted instead a wooden beam, could not recover in contract. Le Bel v. McCoy, 314 Mass. 205 (1943).

Let’s use an example. A subcontractor has a five hundred thousand dollar contract.

It has been paid more or less on time for the first two hundred thousand dollars. Yet, it has completed eighty percent of the work and is looking for eighty percent of the balance of his contract less retention. The contractor pulls off the job and sues for the two hundred and forty thousand dollars (less retention) it believes to be owed. The general contractor - after a warning or two, orally and in writing - terminates the subcontractor. (ED. From a strictly legal standpoint, no party unilaterally has the right to ‘terminate’ a contract. What one really does is terminate the other party’s right to further proceed with the contract.)

In the process of completion, the general contractor incurs costs of more than one hundred thousand dollars in excess of the remaining contract balances. What is possible - even likely - in such a scenario is that the subcontractor does not recover the two hundred forty thousand dollars on its affirmative claim and, further, becomes liable to the general contractor for the additional one hundred thousand dollars of increased completion costs. This is because the subcontractor breached the contract by leaving, thus forfeiting its rights to collect the monies that are otherwise outstanding and becomes liable to the general contractor for the general contractor’s consequential damages as the result of the subcontractor’s breach. Perhaps, it is for situations such as these which caused writers such as Terence to comment that “Extreme law is often extreme injustice.” Or, as stated by the famous attorney Clarence Darrow in an interview in April, 1936: “There is no such thing as justice - in or out of court.” And as stated by Charles Dickens in one of his works: “If the law supposes that,” said Mr. Bumble . . . “the law is a ass, a idiot.”

Whether fair or not, this is a possible and likely result in this situation. This is a principal reason that when confronted with this type of situation, we at the Law Offices often counsel: “Finish the job, unless it is going to put you out of business. The money you spend in doing so is an investment in your ability to collect the older, outstanding money.” Part of the advice is also that the subcontractor is in the best position to finish its job at the lowest possible price because of the fact that it has the benefit of the learning curve - it knows where the bodies are buried - and because, presumably, a subcontractor of any particular trade would be more competent (cheaper) than a general contractor attempting to get this work done.

The problem of miscalculation as to what monies are actually owing and due at any particular point

Now, so far we have discussed two reasons why pulling off for lack of payment may pose difficulties down the road. To the extent that any court were to hold that in any particular contract, the obligations to perform and pay were seen as independent, pulling off the job may not be seen as justified. And, only parties materially performing their contracts are entitled to recover on the same.

Here’s a third issue. Frequently, parties to any problem - e.g. marriage, contracts - are so close to the problem that they really can’t objectively evaluate the problem. For, apart from the above two issues, a court might say that in any particular situation, the party pulling off was not justified due to the fact that that party had over-requisitioned, or that the contracting party had backcharges and claims against the party pulling off or that no payment was yet due due to the presence of a ‘pay-when-paid’ clause which posited the obligation to pay upon actual receipt of monies from the owner. (ED. The subject of pay-when-paid clauses is dealt with at some length in the article “Understanding and Negotiating Subcontracts” to be found at www.sauerconstructionlaw.com.) There could also be issues in terms of whether or not the labor and/or materials supplied are in conformance with the contract documents.

Let’s assume that you are going to pull off or that you want to be able to pull off or put yourself into a position where this has less potential difficulty. What might be some strategies?

A. Make the covenants to perform and pay interdependent as a matter of contract.

This can be done two ways. One is to use a form of contract that already contains such a clause. For example, various versions of the AIA A401 subcontract have specifically provided that a subcontractor can pull off for lack of payment without this constituting a breach of contract provided it give certain notices.

For example, the following language is out of the A401 (1987 edition):

“4.7.1. If the Contractor does not pay the Subcontractor through no fault of the Subcontractor, within seven days from the time payment should be made as provided in this Agreement, the Subcontractor may, without prejudice to other available remedies, upon seven additional days’ written notice to the Contractor, stop the Work of this Subcontract until payment of the amount owing has been received. The Subcontract Sum shall, by appropriate adjustment, be increased by the amount of the Subcontractor’s reasonable costs of shutdown, delay and start-up.”

Such a right also inures to the general contractor with regard to his relationship with the owner when the general contractor has in its contract general conditions such as are contained in AIA Document A201-1997:

“9.7.1. If the Architect does not issue a Certificate for Payment, through no fault of the Contractor, within seven days after receipt of the Contractor’s Application for Payment, or if the Owner does not pay the Contractor within seven days after the date established in the Contract Documents the amount certified by the Architect or awarded by arbitration, then the Contractor may, upon seven additional days’ written notice to the Owner and Architect, stop the Work until payment of the amount owing has been received. The Contract Time shall be extended appropriately and the Contract Sum shall be increased by the amount of the Contractor’s reasonable costs of shut-down, delay and start-up, plus interest as provided for in the Contract Documents.”

Subcontractors, please note. Since general conditions as applicable to the contract documents and relationship between the general contractor and owner are generally incorporated by reference into your subcontract - meaning that in your subcontract, the general contract or general conditions are listed as contractual documents for the purposes of the subcontract - the general contractor rights above could be your rights in similar circumstances. Put another way, unless your contract specifically indicates that you can’t pull off for this reason or your contract doesn’t incorporate specifically the general conditions by reference, you can take advantage as to the general of the same rights and remedies as the general has against the owner.

Or, simply put language in your contract - whatever the form - making the obligations to pay and perform mutually interdependent. For example, one might use language such as follows: “Notwithstanding any other provision of this Subcontract to the contrary, Subcontractor and General Contractor agree that Subcontractor’s obligation to perform and General Contractor’s obligation to pay for those services are bilateral and interdependent.”

While we are talking about putting things in the contract, having a contractual interest obligation for late payments higher than that provided by law - in Massachusetts, this is 12% perannum for contract claims - and having an attorneys’ fee provision in there for any necessary collection efforts may have some slight effect on getting your contractor to ‘do the right thing’.

B. Make one or more written demands on your contracting party prior to pulling off. Courts like to see people act reasonably, even in (especially in) difficult and trying circumstances. This writer thinks that a significant factor in complex contract litigation is that the fact-finder - judge or arbitrator - looks at both parties and evaluates: ‘which one makes more sense’?; ‘which one is more believable’?; ‘which one acted more in good faith?’

The law of contracts has the concept of ‘cure’ in it as a desired element. Namely, before you pull the plug, you point out to your contracting party that your payment is overdue and that the other contractor is in a state of breach. Giving your contracting party a prior opportunity (opportunities) to cure goes a long way towards defeating/precluding your contracting party’s claiming at trial that it was never told by the party pulling off that there was a problem and that, had it known, the problem would have been quickly taken care of.

Also, by making a prior written demand with proof of service - certified mail with a receipt, fax with transmittal - it may be that other factors which are in existence other than simply general contractor or owner malfeasance account for lack of payment or insufficiency of payment. Perhaps the bank (or owner) won’t approve a requisition. Perhaps the architect has been unable to process the paperwork within a contract cycle. (Ascertaining from the owner what the general contractor has requisitioned and been paid on your line items is an important part of this process.) In the law business, we call this ‘free discovery’ and it may be that a circumstance will be revealed which will make pulling off seem less attractive.

Since some contract provisions such as the two AIA provisions referenced above specifically have a specific procedure to follow in terms of pulling off for non-payment, following such a procedure even when it isn’t in your contract is some evidence of your complying with industry standards and customs.

C. Some case law supporting the right to pull off for payment issues.

In Drinkwater v. D. Guschov Co.196 N.E.2d 863, Mass. 1964

the Supreme Judicial Court said:

“By any evaluation of the evidence the plaintiff was entitled to substantially more than the $11,000 which he had received. This underpayment was a material breach of the contract and justified the plaintiff's stopping work prior to the completion of the contract. C. C. Smith Co., Inc. v. Frankini Constr. Co., 334 Mass. 379, 384, 135 N.E.2d 924.”

As stated by the Court in C. C. Smith Co. v. Frankini Const. Co. 334 Mass. 379, 384, 135 N.E.2d 924, 926-927 Mass. 1956:

“. . . . But under the law of contracts and apart from the question of security the petitioner was not obliged to pursue either of these courses. Frankini had broken its contract with the petitioner by not making the payments to it as called for by the subcontract. The finding of the master in the petitioner's favor against Frankini and the decree below thereon establish that the petitioner was not in default. In these circumstances the petitioner could treat the contract as still subsisting but could withhold further performance until it had received the payments in arrears. Restatement: Contracts, § 276, Illustration 5. Williston, Contracts (Rev.Ed.) § 848. Hence its failure to perform between December 8, 1953, and August 11, 1954, when the authority abrogated its contract with Frankini, was justified.”

One might reference these cases in a pre-pulloff cure letter situation.

D. Try to establish, where applicable, that your contracting party was in breach of its contract as a matter of law.

This is a slippery concept to grab hold of. It is one thing to breach a contract as a matter of contract. In determining whether or not a breach occurred, the parties will argue the facts of the job and the specific contractual provisions governing payment and performance.

Can a contract be breached as a matter of law rather than (or in addition to) as a matter of contract? The answer most likely is ‘yes’.

As one example, if you are doing public work, very specific time requirements are established in terms of when a general contractor must pay its subcontractors. C. 30, s. 39F of the General Laws - the demand for direct payment statute - specifically provides that:

“(a) Forthwith after the general contractor receives payment on account of a periodic estimate, the general contractor shall pay to each subcontractor the amount paid for the labor performed and the materials furnished by that subcontractor, less any amount specified in any court proceedings barring such payment and also less any amount claimed due from the subcontractor by the general contractor. . . .” (Emphasis added)

Such a statutory provision represents public policy. While the writer is unaware of any specific definition of what exactly ‘forthwith’ means, it is obviously a very short period of time - probably seven days or less. Thus, to the extent that you can demonstrate that the general contractor has been paid for your items, has no claims against you but still hasn’t paid several months later, this is pretty good evidence of the fact that the contract has been breached as a matter of law.

In Aerostatic Engineering Corp. v. Szczawinski, 1 Mass.App.Ct. 141, 144-145, 294 N.E.2d 521 (Mass.App. 1973) the Appeals Court discussed criteria of breach of contract as a matter of law:

“ The defendant finally asserts that an issue arises as to whether or not the plaintiff, by terminating performance, breached its contractual obligation, thereby causing damage to the defendant. In an affidavit the president of the plaintiff corporation stated that the plaintiff completed at least ninety percent of the contract before terminating because of the defendant's refusal to pay. It is further asserted in the affidavit that in discussions with the defendant, he acknowledged the indebtedness in the amount of $54.000 but that he was unable to make payment of this amount. Nowhere does the defendant dispute this. In fact, in a deposition of the defendant he again admits his obligation to the plaintiff and his inability to pay due to lack of financing. This refusal of the defendant 'to pay so large a part of the total sum payable and due' was a substantial breach going to the root of the contract thus entitling the plaintiff to terminate. Hughes v. Rendle Corp., 271 Mass. 208, 212, 171 N.E. 236. Bucholz v. Green Bros. Co., 272 Mass. 49, 52--53, 172 N.E. 101; Petrangelo v. Pollard, 356 Mass. 696, 701, 255 N.E.2d 342.”

Therefore, it may be possible for a subcontractor to establish a breach of contract as a matter of law if the general contractor has breached a statutory obligation as to the terms and timing of payment. Also, it may be possible to establish a breach of contract as a matter of law where the amount unpaid is so enormous and disproportionate to the amount of work performed that any reasonable sense of fair play is offended.

E. Try to get your contracting party to acknowledge in writing what you are owed before you pull-off.

Even through the cold immenseness of cyber-space and notwithstanding the disassociated nature of print, we can clearly hear you: “R - i - i - i - ght”!

I know of a couple of ways that this can be done. First of all, particularly when you are owed money for quite a period of time, try to get your contracting party to enter into a written payment plan. If you can get his signature on a piece of paper with an amount, this will be helpful in not only establishing breach but in terms of shortening any potential litigation through limiting or precluding any lengthy discussion of issues of liability or quantum (amount). A second way is to have your bookkeeper send to your customer’s bookkeeper a form verifying balances for your financial statement. I have seen these sent back and filled out on several occasions. After all, from a bookkeeping standpoint, what is owed is what is owed. The people that are refusing payment or unable to make payment are generally on a higher pay grade (often a lower moral grade) with different priorities and sensibilities.

As to the first one above, we recently settled a case with a bonding company against a general contractor for a fairly significant sum based on that party’s signature to a letter prepared by my subcontractor client acknowledging owing the money and offering a payment plan (and then breaching the payment plan). And we have had similar results with the ‘account verification’ process discussed above. Either situation is what is called in the law an ‘admission’. Once something is admitted in litigation, it is very hard to get around that.

F. Leave the work in a sensible state of completion.

This is only common sense. Leave the site in such a way that it will be easier for someone to complete and take over your work. After all, if only because you may have guessed wrong, it makes sense to keep the costs of completion as minimal as possible. Also, the work environment should be made as safe as possible to avoid personal injuries and property damage claims.

G. Take date-provable pictures and videos.

In any construction litigation, two of the most telling forms of evidence are good daily reports (is that an oxymoron?) and dated pictures and videos. Don’t assume that someone else will have pictures. It may be of utter importance down the road in court for you to be able to establish to the greatest extent possible what your level and percentage of completion is at the point you pulled off. In other words, if a subcontractor claims the general contractor improperly paid him by paying only for 30% of the work when 65% of the work was done, that subcontractor has both the burden of proof and the burden of persuasion to convince the factfinder - judge or arbitrator - of the fact that your work was 65% done. Simply pointing to a requisition requesting compensation at that level does not prove the point. Standing alone, such evidence is almost irrelevant, as it is common place for one to front end load and the percentage of completion ultimately is what the architect, owner and general contractor say it is.

Keep track of any completion efforts by others through video and pictures. It may be that improvements are made not covered by the contract documents. In other words, the contract documents promised a Ford but they actually built a Cadillac. This is very difficult to prove - or even know - when the building is closed in. No breaches of the peace or trespass in taking these photographs, now! Photograph and video from the street whenever possible.

CONCLUSION

As the above indicates, this is a difficult and complex issue for a variety of reasons.

There is no one pat fix or answer. In the final analysis, doing business with reputable people is a first strategy. Careful contract drafting is a second strategy. If the situation is close - uncertain obligation to pay amount requested at the time, presence of a pay-when-paid clause, failure of an owner to pay for subcontractor’s line items - completing one’s job is a tried and true method of best protecting all prior overdue monies.

Making such a draconian decision would seem to be more justified in situations where there is no possible or available security for your claim. For example, if mechanics lien rights and/or payment bond rights and/or demand for direct payment rights are available, this would seem to make such a decision less supportable. Also, to the extent that your debt is clearly and unquestionably owed and your contracting party has a number of other general contracts it is performing, be aware that with court approval you might be able to ‘reach and apply’ (attach) those other jobs as security for payment for this job. Also, the closer one comes to completion, the less sense it makes to pull off. After all, the risks are the same irrespective of when/where you pull off but your downside decreases in terms of what resources are necessary to complete the job as the job moves closer to completion. Never pull off without at least advising the other party of the fact in writing prior to or contemporaneously with such action, giving the reasons for this.

Some final points from ‘the Sauer files’. Don’t take on too many jobs with a new contractor at the same time. Remember that even in a Ponzi scam, the early folks actually do make money. At the Law Offices we have seen numerous examples where a subcontractor began to work for a new-to-him general contractor and other jobs were quickly added on. It takes a complete job or two before one can tell how a general contractor will act. Learning that the general contractor is a nightmare is a lot more scary when you are contractually obligated to perform four or five more larger jobs with that party. I have personally seen one very good contractor put out of business primarily because of the fact that he took on too much work with someone new. The intangibles of business closure are often far worse than simply closing the door and turning out the lights, including threats to one’s mental and physical health, family disruption and divorce.

Don’t pull off in anger. Haven’t they - whoever they are - said that ‘revenge is a dish best served cold’? (To our male and otherwise kitchen-challenged readers, this doesn’t mean we are talking about left overs!) And cold can be good: beer, ice you are skating over and vichyssoise being only a few examples! Be wary of pulling off as only a matter of tactics or as a naked threat. Things often don’t turn out the way we intend them and even Italians can get their Irish up when pushed.

And, for situations where your potential exposure is significant, discuss the situation with competent counsel before you take this action. Maybe some other ways of handling this situation may be available. And, it may be that you have not taken into consideration - or might not even be aware of - all of the factors and consequences which could follow such action. (If you pull off a project where you have a performance bond, are you prepared to deal with a claim against your own performance bond surety? How would that affect your future bonding?) If you wait to bring this to your attorney’s attention when the barn door is open, the barn empty, even he/she will have trouble in figuring out where the cow is. And, that’s no bull!

Copyright claimed Jonathan Sauer 2004

This article is intended to be general information and does not constitute specific legal advice. If you need legal advice, your interests would be best served by consulting with an attorney knowledgeable in the area of your concern.