DESPITE THE FEELING of success achieved upon placing an order, manufacturing a component to specifi cation, and ontime or even early delivery of a project, these successes are dependent on the ultimate achievement of getting paid for one’s performance, labor, equipment and/or materials. In good times and particularly in challenging economic times, the failure of payment for performance will not only cause a direct impact to your business and operations, but also, potentially, to those suppliers, subcontractors and/or consultants who assisted you in the delivery of the required project, materials, components and/or services. You may want to make certain they have been compensated to allow them to continue operations, avoid your own litigation and avoid impacting future deliveries. However, being forced to make such a payment in the absence of payment to you by the ultimate purchaser will leave your company in an impaired position. All is not lost. In even the most diffi cult times, there are steps available to help secure payment on your given project for the performance you have delivered. Th is is by no means to suggest that these tips would be the only methods of enhancing your prospects of payment. Nevertheless, they should be at the top of your list for navigating through these diffi cult economic waters to a prompt and proper payment.
1. READ YOUR CONTRACT.
It may go without saying that your contract should be consulted when it comes to identifying obligations of payment. Oft en it is the contract’s provisions that are overlooked when it comes time to insist there is a failure of payment on the project. Consider the recourse provided by sections 2.1.2 and 2.2.1 of the Washington, D.C.-based American Institute of Architects A201 General Conditions for Contracts for Construction, 2007 Edition. The sections provide the following:
2.1.2 The Owner shall furnish to the Contractor within 15 days aft er receipt of a written request, information necessary and relevant for the Contractor to evaluate, give notice of or enforce mechanic’s lien rights. Such information shall include a correct statement of the record legal title to the property on which the Project is located, usually referred to as the site, and the Owner’s interest therein.
2.2.1 Prior to commencement of Work, the Contractor may request in writing that the Owner provide reasonable evidence that the Owner has made financial arrangements to fulfi ll the Owner’s obligations under the Contract. Th ereaft er, the Contractor may only request such evidence if (1) the Owner fails to make payments to the Contractor as the Contract Documents require; (2) a change in the Work materially changes the Contract Sum; or (3) the Contractor identifies in writing a reasonable concern regarding the Owner’s ability to make payment when due. Th e Owner shall furnish evidence as a condition precedent to commencement or continuation of the work or the portion of the Work aff ected by a material change. After the Owner furnishes the evidence, the Owner shall not materially vary such fi nancial arrangement without prior notice to the Contractor.
These sections still are powerful tools for securing payment for performance and setting conditions for further performance in the event the owner’s fi nancial situation becomes a concern. These provisions, or those like them, should be considered and consulted whenever there is an incident or circumstance arising on the project which would give rise to financial security concerns on the part of the contractor or supplier, as the case may be.
2. LIENS ARE A MEANS.
Another and very important and powerful tool for pursuing and securing the right to payment for performance are the mechanics and/or materialmens lien statutes that exist in all 50 states. Although it would be impossible to analyze every unique statute in an article of this size, there are some extremely important general features that need to be identifi ed. Initially, a mechanics lien presents a mechanism whereby a lien can be placed on the owner’s property prior to any hearing taking place as to the validity of that claim. In exchange for such an extremely powerful right, there are very rigid requirements, including registrations to do business in certain jurisdictions and notices to various participants in the project. In some instances even prior to the work starting, prior notices of intention to pursue the lien and compliance with the requirement for filing and perfecting the lien claim are required. Nevertheless, because these liens can provide priority security interests greater than those of lending institutions, it is a method by which to, at a minimum, get immediate attention for your claim and also exert appropriate leverage against a project to make certain your payment is being placed at the top of the list for satisfaction.
3. BOND—SURETY BOND.
On many projects, an owner may have required as a part of the contracting obligation that the contractor supply a performance and/or labor and material payment bond. These instruments are commitments by a third-party surety company that they will stand behind and assure, not insure, the contractor/ principal’s performance obligation. That performance obligation at times can include, particularly in the case of the labor and material payment bond, the prompt and proper payment of the subcontractors, suppliers and other named “obligees” identifi ed directly or by category in the surety bond, as well as any incorporated documents. Much the same as in the mechanics lien scenario, it is imperative the bond terms be complied with to assure the maximum potential of recovery. Th is requires securing the bond as soon as possible, not just when payment may be a concern. Another signifi cant feature is being a proper claimant under the bond. Should it be determined upon a review of the bond that you may not be within a protected category, it may be very worthwhile to secure another means or mechanism of securing payment.
4. PUTTING TRUST IN A TRUST.
In some jurisdictions, payment by an owner to a contractor can result in the imposition of trust obligations for that compensation. Indeed, failure to provide payment to the subcontractors and suppliers who have provided the performance on which the contractor has obtained that compensation from the owner may result in significant penalties to the contractor. It is important to evaluate whether there are such provisions available on your project. Reminding the contractor of such an obligation may very well get the contractor’s attention focused on satisfying its payment obligations to you before others’ competing demands of payment are addressed. Some of those provisions actually are found in the body of the contract documents and may be means by which to alert the owner that the contractor has not fulfi lled its compensation requirements in a prompt or contractually compliant fashion. Again, this may be sufficient leverage to cause the contractor to issue payment to the subcontractor or supplier, even when previous requests or phone calls have gone unnoticed.
5. PAYMENT POTPOURRI.
The last tip for persuading payments when prior promises were possibly prevaricated involves a multitude of potential mechanisms for encouraging compensation. For example, many jurisdictions are adopting or already have adopted prompt payment acts containing methods for securing penalties and attorneys’ fees if a suit needs to be commenced to secure payment. Another avenue to investigate is the existence of joint check provisions in the owner-prime contract agreement that can be activated by an owner on notice from a subcontractor or supplier that a contractor has not been meeting its obligations. Yet another potential means to secure payment, aside from the potential of presenting a mechanics lien against the project, can reside with an escrow account or some other level of security, including a parentcompany guaranty, that can be called upon to address payment where there has been a default in compensation obligations. Finally, there always is the very serious but sometimes necessary possibility of terminating the contract based on the material breach of failure of payment. While such an action should be taken with the most extreme caution, it sometimes can provide the only method of cutting off future exposure while putting signifi cant amounts of leverage on the owner that in the event payment is not made, no further performance will be provided. Just as diligence is required at times to successfully conclude the initial procurement, contract or sale and diligence is required to meet the standards and timetables for performance, diligence also is required to ensure procurement and performance translate to payment at the end of the day. With so much at stake on any job, particularly in economic climates where continued cash fl ow is imperative, pursuit of these avenues may very well be a road to financial recovery.
Edward B. Gentilcore is vice head of Duane Morris’ Construction Group, Pittsburgh. He practices in the areas of general and complex commercial litigation with a considerable emphasis on construction litigation, construction contracts and mechanics lien matters. He also has experience in the preparation of design and construction contracts, including those involving green-building design and construction with a focus on dispute-prevention considerations. He can be reached at ebgentil core@duanemorris.com or (412) 497-1007.