Getting paid for your work is often times one of the hardest parts of a project. If you find yourself working without getting paid, it’s easy to think, “I’ll just stop working until I get paid.” While the law may support you in that decision, the contract may not and you may be found in breach of the contract if you walk off the job.
Nebraska courts have held that a contractor or subcontractor may stop working on a project if the owner or upstream contractor is in material breach. This, of course, raises the question of “What is a material breach?” The facts of the particular circumstance will control. But, the risk is significant. If the unpaid contractor is wrong, in that the breach is not material, he will face the claim by the upstream party for all costs necessary to finish the contractor’s work. If the upstream party is in material breach, he will face a claim for profit on the remaining portion of the project.
Nebraska’s Prompt Pay Act
Nebraska’s Prompt Pay Act requires a contractor to pay downstream contractors within 30 days of receipt of payment from the Owner. Section 45-1203 Neb. Rev. Stat. The Prompt Pay Act does not specifically authorize termination for failure to pay. Instead, section 45-1205 allows for interest to be charged if a contractor is not paid.
Typical Contract Language
The AIA A201, General Conditions, allows the contractor to terminate the project if payment is not made. Section 220.127.116.11 provides:
The Contractor may terminate the Contract if the Work is stopped for a period of 30 consecutive days through no act or fault of the Contractor or a Subcontractor, Sub-subcontractor or their agents or employees or any other persons or entities performing portions of the Work under direct or indirect contract with the Contractor, for any of the following reasons:
. . .
.3 Because the Architect has not issued a Certificate for Payment and has not notified the Contractor of the reason for withholding certification as provided in Section 9.4.1, or because the Owner has not made payment on a Certificate for Payment within the time stated in the Contract Documents;
But, the contractor must provide written notice to the owner and architect if it intends to terminate. The notice provision, section 14.1.3 provides:
If one of the reasons described in Section 14.1.1 or 14.1.2 exists, the Contractor may, upon seven days’ written notice to the Owner and Architect, terminate the Contract and recover from the Owner payment for Work executed, including reasonable overhead and profit, costs incurred by reason of such termination, and damages.
In a nutshell, a contractor will have to submit a pay application to the architect, continue working at least 30 days after the pay application should have been paid, and then work another seven (7) days after providing written notice of its intent to terminate.
Take Away: Terminating a contract for failure to pay is risky. The contract may provide a contractor with the opportunity to terminate the contract, but you must follow every step of the contract to avoid a claim of breach by the upstream contractor.