Collecting that account receivable – staying smart on credit
Get it in Writing
The first thing you need to do is get your agreement in writing. Use a construction contract; it will be much easier to prove your point in court than relying on some type of verbal agreement based on a hand shake.
Secure Your Payment
Next, you need to secure your rights to be paid with some type of legal instrument. Whether it’s a construction lien on real property or a UCC on materials; it’s critical that you secure your right to be paid.
The worst thing that you can do is send bills sporadically. Your customers need to know you’re serious about getting paid and they can set their watches on the bills that they receive from you.
Limit Your Credit Risk
To the extent you can limit your exposure by limiting the credit you give, you should do that. It’s much easier to suffer a loss of $5,000 than $50,000. You need to make credit decisions based on the credit risk of the customer.
Contact Delinquent Accounts Often
So you have a delinquent account; what do you do? Yes, you must do the obvious – contact the account holder. Do it verbally and in writing, nicely and firmly but do it, and do the best you can to get the customer to start paying you.
Resolve Disputes Quickly and in Writing
Sometimes your customers will tell you that the goods arrived late or that they are unhappy with your service. Try to resolve these issues yourself. Better to give a small credit in exchange for a payment, and move on.
Negotiate with Decision Makers
Whenever you’re negotiating either the contract or a delinquent debt, make sure you’re negotiating with someone that has the authority to make decisions. Avoid the frustration of negotiating with a bookkeeper with no real authority. Deal with someone who can actually move the ball forward.
Condition any Credit on Prompt Payment
After you decide that you’re going to provide a credit in exchange for an immediate payment, make sure that that condition is expressly set out in a written agreement (can be an email). The last thing you want is to give a credit and then keep waiting on a promised payment.
Don’t Delay in Initiating the Legal Process
Once you determine that there’s nothing more you can do yourself, don’t wait to enforce your legal rights. Get to your lawyer ASAP. Every day that goes by makes it that much harder to collect the debt.
Avoid Emotional Decision Making
Leave your emotions at the door when you deal with credit issues; it makes resolving a business dispute much easier. The same applies in collecting a debt.
If you employ all of these 10 debt collecting strategies, you’ll likely see your cash flow increase and your frustration level decrease.
What is the First Step
Step one – make sure that you are billing regularly for the debts that you’re owed. Whether that’s monthly payment applications or invoicing based on your contract, whatever it says in your contract or your agreement, that’s what you need to do to make sure that you document the fact that you’re owed money.
You Need to Document Everything
Sometimes clients come to me and say, “Well I’m owed this money on a change order, “but I’m told that I can’t bill it.” While that may be true, recognize that, if you don’t submit a bill, you’ll have a hard time convincing a judge that you’re owed this money.
Secure Your Lien Rights
Next, at the beginning of the job, you need to make sure that you serve the proper preliminary notices under your lien and bond rights. So that’s typically a notice to owner or notice to contractor, usually done no later than 45 days from your first work or delivery of materials on the job site. And those 45 days, that’s the date that it needs to be received by the owner, not just the day you mail it.
So you get this preliminary notice out of the way, the next step is within 90 days of your last work on the job or last delivery of materials, you need to record a claim of lien or serve a notice of non-payment on the bonding company.
Remember that these notices and the lien have to happen absolutely no later than 90 days from your last work. That does not include punch list work and it does not include warranty work. These are very tight deadlines, both the 45 days and the 90 days.
Enforce Your Lien
Assuming that you have properly protected your rights under the lien and bond law, you then need to make sure that you enforce your rights. The lien and the bond claims, won’t produce dollars all by themselves. It’s not that you serve this document and all of a sudden you get paid. You need to make sure that you follow up on it.
You need to be communicating with emails and phone calls. And when you get to a point where you’re getting the run around, you’re not getting answers,and your calls are not being answered, that’s when you need to call a board-certified construction attorney to help you get paid.
Most Cases Settle
Most collection cases that we handle settle, typically within one to four months of our filing the case. And that’s because the other side gets a lawyer, the lawyer usually is knowledgeable about these issues, and can explain to them that in many instances, subject to very limited exceptions, if work was done on their property, materials were delivered and releases were not given, the money is owed. They may have some back charges, they may assert other issues, but remember that if you do nothing, you will likely get nothing.
We Can Help You Get Paid!
That explains the process from beginning to end of collecting your debt. Don’t let it just sit in your QuickBooks or Sage accounting system, do something so that you can get paid. Turn that account receivable into actual green dollar bills so that you can pay your bills, and maybe have made some money on that job, and make some profit. If you have questions about this or any other lien or contract topic, send me an email, email@example.com.
3 Ways to Stay Smart about Credit
Operate a construction business and you will inevitably end up wearing several hats: handyman, salesperson, estimator, bookkeeper and project manager. With so many responsibilities, it’s easy to overlook things, but the one thing you don’t want to ignore is building and maintaining good credit. You might think this is unimportant, especially when things are going so well in your business. But as so many experts point out, the best time to prepare for a downturn is when business is booming. With a few simple steps, you can establish and maintain a positive profile. Here are 3 ways to stay smart about credit:
Stay on top of your profile.
If you don’t have a profile, contact Dun & Bradstreet, which maintains credit files on businesses. It assigns credit scores based on a wide range of factors, including revenue, location, number of employees, length of credit history, and type of industry. Lenders will use this information to determine your company’s creditworthiness.
Pay your bills and pay them on time.
Paying your obligations demonstrates that you have positive cash flow and the resources to cover your liabilities. Paying them on time means you’re a diligent businessman and a good business risk. Paying late places your credit at risk and damages your reputation before potential lenders.
Limit your borrowing.
How much and how often you borrow and how quickly you retire any debt impacts your credit. Short term and long term debt on your balance sheet can have a negative impact on your company’s value and make you a lending risk.
Why Do You Need Good Credit?
Cash flow is one of the major concerns of any business, especially in the construction industry. Credit can provide you an injection of additional dollars, allowing you to expand and even become more profitable.
Access to money when you need it.
When it comes to owning a business, too much demand is typically a good problem to have. But if you lack the financial resources to expand when needed and to take on new work, you can end up like countless other businesses that fail because they can’t afford to finance their own growth.
Better finance terms.
When you need to borrow money, a positive credit history will net you more favorable terms. Whether you are applying for a credit card, a line of credit, or a loan, a better credit profile translates into lower interest rates and easier access to the funds you need.
Eliminate need to prepay.
Good credit should reduce if not dispense with the need for any prepayment requirements in your business. Being a good credit risk gives your suppliers the sort of comfort they need to allow you to purchase products and services for your business under normal payment terms.
Good credit is essential to all business concerns – make it happen.
3 Do’s and Don’ts to Keep You Out of Court and Get Paid
Smart business practices can go a long way toward reducing, even eliminating, the chance of legal trouble on a construction project. With that in mind, here are three Do’s and three Don’ts that can keep you from being sued by unhappy customers or vendors.
DO get it in writing – always.
Even a small job needs a formal written agreement. It should include scope, price, payment terms, and schedule. It should reference a complete set of plans and specs. It should include language on insurance, indemnification, warranty, termination, dispute resolution, and recovery of legal fees and costs. After you have a signed contract, continue to get everything in writing, especially changes. Have customers and vendors acknowledge each agreement, promise, or direction in an email, text, or a written document of some sort. Memories fade with time.
DO review the plans, the specifications and the site.
Plans and specs are the roadmap for getting the job done with as few hiccups as possible. But plans and specs can be incomplete or unclear, leaving out key details – ingress or egress problems, for example – that you need in order to properly price and build the project, and which you may only discover by visiting the site.
DO manage expectations.
Projects start off with the best of intentions but with different expectations. Review the scope of work and payment terms with your customers and vendors so they know what you plan to do, when you plan to do it, and how you expect to be paid. Surprises on construction projects are seldom pleasant. This will help minimize them.
DON’T start work without a deposit or assurance of adequate funding.
In most cases you will want some money upfront, even if it’s just 5% or 10% of the project sum. If it’s not customary to obtain such a deposit, you should get documentation verifying the customer’s ability to fund the entire project. A good start would be a letter from the lender on the project.
DON’T work without insurance.
Things can go wrong very quickly on any sort of construction project, and a $50,000 job can easily turn into a million-dollar liability. Proceeding without insurance coverage – be it for personal injuries, damage or loss to property, or just mistakes – is simply not worth the risk. You also need to make sure all subcontractors are insured. Deal with valid certificates of insurance, and endorsements that name the contract parties as additional insureds. And don’t forget to obtain new certificates and look for endorsements when policies renew.
DON’T walk off a job.
Relationships with customers and vendors can sour. When that happens, it may be tempting to abandon the work, especially if the customer isn’t paying you or a vendor isn’t fulfilling its orders. But don’t do it, at least not before you review your contract in detail, ideally with your legal advisor. Courts have historically not looked kindly at contractors who walk off jobs, especially without adequate written notice. Once you finish your work, you can put in the necessary effort to collect the money you earned.
Steering clear of legal trouble is both dollar wise and business savvy. Underscoring each of these do’s and don’ts in your communications and documentation will keep all parties well informed, and should keep you out of trouble and out of court.
Getting paid fast
Not receiving payment for your work is a principal concern on every job. Especially today, with everyone facing tough economic challenges, it has become a real concern to get paid when you are supposed to. Generally, contractual disputes on construction projects are complicated by the fact that not all of the parties have actually contracted with each other. It is not uncommon for several layers of separation to exist between the persons or entities actually performing the labor, services or providing materials and the owner. The general contractor, architect, or engineer may each contract directly with the owner. The general contractor will in turn then contract with any number of subcontractors, who themselves contract with one or more sub-subcontractors and/or material suppliers. The one constant is that the owner remains responsible for making payments when due. Once paid over, however, the money does not always flow down the chain as it should. This problem becomes more acute as the project nears its end.
One of the many reasons parties hesitate to file a court action to recover money owed is the cost of litigation and the length of time it takes to obtain a final judgment. The Florida Legislature recognized this problem and set out a workable solution providing for swift payment. There is a little known provision of Florida’s Construction Lien Law, Fla. Stat. §713.364, which allows any person who provided labor, services or furnished materials constituting a permanent improvement to real property, on a private project, to get paid the undisputed amount owed on an expedited basis. This provision also awards the prevailing party its reasonable costs and attorney’s fees at trial and on appeal. This last point usually catches the attention of most, because it is generally understood that you cannot recover your costs and attorney’s fees unless you record a lien or such a recovery is in your contract. For those contractors and materialmen who failed to record a lien and who mistakenly omitted an attorney’s fees provision from their contracts, this prevailing party provision in Fla. Stat. §713.364(7) provides the proverbial “hammer” and the needed leverage to assert a forceful claim.
How does this work?
Generally, the cause of action arises once any person has received a payment for work on a project and then fails to make payment to its contractors, subcontractors, sub-subcontractors, laborers or material suppliers within thirty (30) days after the date the labor, services or materials were furnished and payment was due or within 30 days after the date payment was actually received, whichever is later. Requesting a sworn statement of account is a good first step to confirming the amounts paid. Once the complaint is filed, the Court is obligated to set a hearing upon not less than 15 days notice. The only defenses to this action are that payment was not actually received or that a bona fide dispute exists as to what is owed. This is further qualified by the fact that any alleged defense must be proven by competent substantial evidence before the Court at the expedited hearing. If the defenses cannot be proven at that time, then the moving party is entitled to a money judgment for the undisputed amount as well as its reasonable attorney’s fees and costs.
It may take a “village” to successfully complete a construction project, but it only takes one payment hic-up to derail a job. Being aware of your statutory rights to payment may surely come in handy to keep both you and your project on track.
1 Similar relief for public projects is set forth in Fla. Stat. §255.071
Prompt Payment: A Requirement, Not an Option
Florida Statute §255.071 is a little known but potent tool for subcontractors and materialmen. It allows them to seek immediate payment on undisputed contract obligations due on public projects from contractors who have already been paid.
While a contractor may find it preferable for cash flow reasons to simply keep a subcontractor waiting, even after receiving payment for its portion of the work from the municipality or public entity requesting the work, it is neither legal nor smart. Contractors would do well to heed the recent ruling by Florida’s Third District Court of Appeal. The Court made clear that ignoring this statute comes with the penalty of paying accrued interest, attorney’s fees and costs, holding that the subcontractor was “entitled to various immediate remedies” for rapid recovery of the undisputed contract obligations.
And it isn’t just on public jobs that subcontractors have this level of protection. Florida Statute §713.346 provides similar guidelines for contractors performing private work.
It States in Pertinent Part:
Any person who receives payment for constructing or altering permanent improvements to real property shall pay, in accordance with the contract terms, the undisputed contract obligations for labor, services or materials provided on account of such improvements.
Ever mindful of the uneven bargaining position in which most subcontractors and materialmen find themselves, the legislature sought to level the playing field. Florida lien law, along with these statutes, are one way of doing so. Follow the payment dollars, some of them may be yours.
Prompt Payment Statutes
A recent case addressed a little known Florida statute. Fence Masters Inc. v. Zurqui Construction Services Inc. stemmed from a subcontractor’s request for payment on work done to improve public property under a contract with a general contractor. Owed $165,980.90 which the general contractor refused to pay, the subcontractor filed suit and learned during discovery that, in fact, the general contractor had been paid by the owner — the City of Ft. Lauderdale — for all monies due the sub. Alleging a violation of Florida Statute §255.071, the subcontractor sought, but initially lost its request for, a judgment before the trial court. On appeal, the subcontractor was vindicated, when the Third District Court of Appeal agreed with Fence Masters’ lawyers and held that the subcontractor was entitled to various immediate remedies for the rapid recovery of all undisputed contract sums.
Florida Statute §255.071 provides:
(1) Any person, firm or corporation who receives a payment from the state or any county, city or political subdivision of the state, or other public authority, for the construction of a public building, for the prosecution and completion of a public work, or for repairs upon a public building or public work shall pay, in accordance with the contract terms, the undisputed contract obligations for labor, services or materials provided on account of such improvements.
(2) The failure to pay any undisputed obligations for such labor, services or materials within 30 days after the date the labor, services, or materials were furnished and payment for such labor, services or materials became due, or within 30 days after the date payment for such labor, services or materials is received, whichever last occurs, shall entitle any person providing such labor, services, or materials to the procedures specified in subsection (3) and the remedies provided in subsection (4). (2. When dealing with a local government entity, the obligation to pay actually matures within 15 days following receipt of payment.)
What this means, as supported by the Third District Court of Appeal, is that anyone receiving payment from a public entity for work done on a public project is statutorily obligated to pay the labor or material provider for the undisputed contract sum.
Failing to do so within 30 days of receiving payment or the last day the work or material was supplied, subjects one to significant immediate risk. Remedies include the ability to request an accounting from the contractor as to the use of payments received from the owner, the placement of a temporary injunction against the recipient of monies paid by the owner, prejudgment attachment against the contractor, and of course, the recovery of interest as well as accrued attorney’s fees and costs. It should be made clear, however, that these remedies are available only to the extent there is no genuine dispute regarding the contract sum and there is no material breach of the contract by the subcontractor or materialman making the request.
While this decision and the referenced statute apply to public projects, all is not lost for those working on private contracts. In fact, Florida Statute §713.346 provides similar rights to subcontractors, sub-subcontractors, materialmen and suppliers performing work on nonpublic work.
Florida Statute §713.346 states in pertinent part:
Any person who receives a payment for constructing or altering permanent improvements to real property shall pay, in accordance with the contract terms, the undisputed contract obligations for labor, services or materials provided on account of such improvements.
A party who believes he or she may not have been timely or properly paid can utilize other provisions of Florida’s construction lien laws allowing for a party to request a copy of the owner’s contract and a statement of amounts due or about to become due (otherwise known as a Request for Sworn Statement of Account under Florida Statute §713.346). This leaves the party receiving the request with 30 days to respond under oath. One holding a valid lien can also make written demand on the owner for a written statement under oath showing the amount of all direct contracts and the amount paid by or on behalf of the owner for all labor, services, and materials furnished, the dates of payments made, and the estimated costs for completion. The same rules apply; the owner has 30 days to supply a responsive statement under oath. These responses can set the stage for a lienor’s prompt payment request.
The lesson is clear for contractors — pay promptly any undisputed construction obligation or suffer serious consequences later.
Should you cash that check marked “paid in full”
You are finally getting to the end of that large remodeling project. The wood decking is done, the replacement siding is in and the new kitchen appliances delivered. So you tally up those few remaining change orders and submit your last payment application. But to your surprise, you hear from the owner that she doesn’t totally agree with your claim for extras. You explain that the scope of the contracted work increased with some of the changes requested by the owner but she just isn’t seeing it your way. You then receive a check in the mail for a significant portion of what you are owed but it is less than the amount you had invoiced. The check is marked “Payment in Full” in the memo line on the front of the check and is enclosed with a letter from the homeowner explaining her position and disputing your claim for some of the extras. She insists that the check represents full payment for your work. You wonder – should you cash the check, and if you do, will you still be able to make a claim for the unpaid balance? Unfortunately, in many states, the answer is no.
Cashing a check with any form of full payment designation such as payment in full, final payment, paid in full or full settlement, especially when that check is accompanied by a letter or note explaining why the check is to constitute full payment, is generally interpreted by many courts as a complete discharge of a given obligation. It is considered an accord and satisfaction – legal terminology meaning the parties have reached an agreement to resolve their pending difference.
It can make a difference where the paid in full notation is found. When simply written at the bottom of the check, more as a reference or reminder to the issuer, it is less likely to be legally enforceable. However, when placed on the back of the check, above the endorsement line, then it becomes a more effective notice since the person receiving the check would be signing directly under the notation. Endorsing and cashing such a check is more likely to be accepted by a judge as an accord and satisfaction of the disputed sum. Of course, if the paid in full check is received with a letter explaining the owner’s belief that this is all that is rightly due, then you will really be hard pressed to argue you were not aware of her intent when you cashed her check. Your subsequent endorsement of a check received with such a letter will generally be seen as your acceptance of the reduced payment as full and final payment of your invoice.
The situation is a bit trickier if payment is made through some form of direct deposit, such as Venmo or Zelle Quick Pay. Such payments are generally automatically accepted into the recipient’s account. Reversing such a transaction can be complicated, often requiring the permission of the sender. While some Zelle accounts do allow the recipient to reject the transaction within a certain number of days – if not accepted, the funds are returned – one should not count on this to occur. Better to cut a check for the disputed amount ( once that has cleared your account ) and return it to the customer with an explanation that this less than full payment is simply not acceptable.
So how about just striking the “payment in full” notation, cashing the check, and continuing to make a claim for the difference? The law is not so clear on this approach. While a few courts have held that such a unilateral deletion can extinguish the full payment limitation, most others have held that if such a cross out is to be effective it must be mutually agreed to.
Of course, if you and the owner agree to settle your disagreement by accepting a reduced payment then, cashing the payment in full check would be fine. But if you and the owner can’t see eye to eye on the issue, the better approach would be to avoid the temptation of cashing that large check and instead return it to the owner along with all your calculations and support in an attempt to resolve the dispute for the correct amount. Simply cashing the check and expecting you can argue about it later would be a mistake – a big mistake.
Multiparty Checks In Construction
If a check is directed as payable to two or more payees whose names are separated on the payee line by a diagonal slash, or virgule symbol (as in the form of “John Smith/Bob the Builder, Inc.”) they are considered to be payable in the alternative and not jointly. Therefore, in many jurisdictions, endorsement by only one of the named payees on such check can be deemed adequate.
In Florida, banks will generally negotiate checks when they are endorsed by only one of the two payees if it is ambiguous whether the check was drafted as payable in the alternative.
But what happens if a check is issued to “stacked payees,” as follows:
Bob the Builder, Inc.
A bank presented with such a payee designation may consider that the payee is ambiguous and as a result, the check may be appropriately payable to either one of the two payees, therefore requiring only one endorsement. So, John Smith could go to his bank, cash the check without any endorsement from Bob the Builder, and leave Bob the Builder out in the cold. Not a good result for Bob.
Multiparty checks in construction can become a problem. Contractors therefore need to be especially mindful of the consequence of failing to specify an “and” in between payees when expecting such a payment.
Florida law, as many other jurisdictions, now makes clear the following:
If an instrument is payable to two or more persons alternatively, it is payable to any of them and may be negotiated, discharged, or enforced by any or all of them in possession of the instrument. If an instrument is payable to two or more persons not alternatively, it is payable to all of them and may be negotiated, discharged, or enforced only by all of them. If an instrument payable to two or more persons is ambiguous as to whether it is payable to the persons alternatively, the instrument is payable to the persons alternatively. The next time you are to receive a multiparty check, request the inclusion of “and”. Otherwise, you could find out that only one party can negotiate the check and that party did so without you.
Collecting the Undisputed Portion of a Construction Claim
Most construction claims are made up of amounts that are in dispute and others that are not. And often, the party holding the undisputed sum does so to exert leverage. But Florida construction makes collecting the undisputed portion of a construction claim possible.
The Law Is On Your Side
Florida law states that any person who receives a payment for constructing or altering a permanent improvement to real property must pay, in accordance with the contract terms, the undisputed contract obligation. The failure to pay that undisputed obligation within 30 days after the date the labor, services or materials were furnished and payment became due, shall entitle any person providing such labor, services or materials to certain remedies.
Here’s How It Works
The person not paid an undisputed amount must first file and serve a verified complaint alleging: the existence of a contract to improve real property; a description of the labor, services or materials provided; an allegation that the labor, services or materials were provided in accordance with the contract; the amount of the contract price; the amount, if any, paid pursuant to the contract; the amount that remains unpaid pursuant to the contract; the amount that is undisputed; that the undisputed amount has remained due and payable pursuant to the contract for more than 30 days after the date the labor or services were accepted or the materials were received; and that the person against whom the complaint was filed has received payment on account of the labor services or materials described in the complaint more than 30 days prior to the date the complaint was filed.
After service of the complaint, the court will conduct an evidentiary hearing on the complaint upon not less than 15 days written notice and will explore remedies such as a temporary injunction, prejudgment attachment and such relief as may be appropriate in accordance with the requirements of the law.
What Are You Waiting For
Collecting the undisputed portion of a construction claim is something you can do. The court must provide you a remedy without regard to whether or not irreparable damage has occurred or will occur. Of course, all this does not apply to the extent a bona fide dispute exists regarding any portion of the contract price or in the event you have committed a material breach of the contract. But if you haven’t, also know that the prevailing party in any proceeding under this law is entitled to recover costs including a reasonable attorney’s fee at trial and on appeal. So, don’t wait any longer than you have to; contact your Florida construction advisor and take advantage of the legal remedies that are available to you.
If you are the owner of a property that is the site of a construction project, one way to limit your exposure to the individuals and companies working on the project is to make “proper” payments during the course of construction. The proper payments defense limits an owner’s liability for liens to the contract price. In practice, this defense means that if the owner fulfills its obligations under construction lien law, its liability for liens will not exceed the contract price.
Keep in mind that a lienor has ninety days from the date of its last work in which to record a claim of lien, there are three steps an owner should take in order to position itself to assert the proper payments defense.
What are the Steps for a Proper Payment?
Before making payment to the contractor, determine that potential lienors have been paid to the extent that you have made payments to the contractor. There are several ways that you can determine the payment status of potential lienors. One is to secure a release of lien from all persons who served notices to owner (remember that a person has forty five days from its first work in which to serve a notice to owner). Another is to secure releases of lien from the contractor. Also, before making partial payments, you should obtain a contractor’s affidavit indicating that potential lienors have been paid. Be aware that, if you pay a lienor who served you with a notice to owner without obtaining a release from that lienor, such payment is not a proper payment as to that lienor.
before making the final payment, you should obtain a contractor’s affidavit which states that all potential lienors have been paid (or which lists those that are unpaid). If you make a final payment without the benefit of a contractor’s final affidavit, there is a serious risk that you will have to pay subcontractors who were not, in fact, paid by the contractor.
you should not make any payments to the contractor after the expiration of a notice of commencement. Any payments made to the contractor after the notice of commencement has expired are not “proper” for the purpose of claiming the proper payments defense.
What is not a Proper Payment
Any payment that is not made in compliance with these three steps is not a “proper payment”, and will not reduce the owner’s exposure for liens. Merely claiming that you made all payments you thought were due is not enough. You should obtain the necessary releases and contractor affidavits as you make payments through the course of a construction project so that you will have the proper documentation to claim a proper payments defense if the need arises. As an owner, it is important to make sure that the payments you are making on the project are made “properly” in order to reap the benefit of the proper payment defense. By doing so, you will reduce any possible exposure to those liens in excess of the contract price.
Retainage is a part of every pay application, especially on a commercial job. But you may be in luck if you’re working for a local municipality. That’s because at 50 percent completion “… most public entities must reduce to 5 percent the amount of retainage withheld from each subsequent progress payment made to the contractor”. The term “50-percent completion” means the point at which the public entity has expended 50 percent of the total cost of the construction services purchased as identified in the contract, together with all costs associated with any existing change orders and other additions or modifications to the contract.
Florida Statutes state that after 50-percent completion the contractor may present to the public entity a payment request for up to one-half of the retainage held by the public entity and it means the public entity shall promptly make payment to the contractor, unless the public entity has grounds for withholding the payment of retainage. Pretty straight forward.
A general contractor, on the other hand, may elect to withhold retainage from payments due to subcontractors at a rate higher than 5 percent. The specific amount to be withheld must be determined on a case-by-case basis and must be based on an assessment of the subcontractor’s past performance, the likelihood that such performance will continue, and an ability to rely on other safeguards. The subcontractor must be notified in writing of any determination to withhold more than 5 percent of the progress payment and the reasons for making that determination.
On a private job, retainage, both as to amounts withheld and amounts released, is strictly based on what has been contracted. While most contracts call for the owner to retain 10 percent of each payment request till final completion, know that one is free to negotiate both the amount to be withheld as well as the timing on when a portion or all of that amount is released.
Pay-when-paid contingent payment clauses
Contingent payment clauses can be found in almost all Florida subcontracts. These clauses require an owner to make payment to a contractor before the contractor has any obligation to pay the subcontractor. These clauses continue to expand in scope, often including the surety (where there is one), and may also provide that the subcontractor has no cause of action of any kind against the contractor or surety if the contractor is not paid.
Several states have banned these types of provisions on the grounds that they contradict public policy or that they impair a subcontractor’s ability to exercise its rights under state lien law.
Contractors include contingent payment provisions for understandable reasons. Contractors generally operate on thin margins, and it could prove financially disastrous for a contractor to “finance the job” and pay all of its subcontractors and suppliers in advance of payment from the owner. Yet this rationale ignores the effect of non-payment on each subsequent step in the chain of contracts, as it is no less disastrous for a subcontractor to have to pay all of its sub-subcontractors, suppliers, and personnel out-of-pocket.
As a brief background, any entity or laborer who improves real property under a contract or subcontract has a right to claim a lien against the improved property in the case of non-payment. Florida law prevents a lienor from waiving its right to claim a lien in advance of performing the work. A payment and performance bond (“bond”), issued by a surety on behalf of the contractor, guarantees payment to subcontractors and suppliers, and guarantees that the contractor will complete the project. It serves as substitute security for lienors, protects an owner’s property from claims of lien, and the right to claim against it may also not be waived in advance.
The issue to be reviewed below is twofold:
- Does Florida’s lien law provide a basis for outlawing pay-if-paid clauses?
- Does Florida’s lien law provide a basis for finding pay-if-paid clauses unenforceable to the extent that they impair lien or bond rights?
Does Florida’s lien law provide a basis for outlawing pay-if-paid clauses?
No, neither Florida’s Lien Law nor any other provision of the Florida statutes provides a basis for outlawing pay-if-paid clauses in their entirety.
Those states that have prohibited pay-if-paid clauses in their entirety have generally done so by a statute that specifically addresses this issue. North Carolina’s N. C. Gen. Stat. § 22C-2 states that:
Performance by a subcontractor in accordance with the clauses of its contract shall entitle it to payment from the party with whom it contracts.
Payment by the owner to a contractor is not a condition precedent for payment to a subcontractor and payment by a contractor to a subcontractor is not a condition precedent for payment to any other subcontractor, and an agreement to the contrary is unenforceable.
Similarly, Wisconsin’s Wis. Stat. § 779.135(3) explicitly prohibits clauses in contracts for the improvement of land which make “payment to a prime . . . a condition precedent to a prime contractor’s payment to a subcontractor, supplier, or service provider.
Florida’s statutes contain no such admonition and, until they do, pay-if-paid clauses will continue to haunt subcontracts.
Does Florida’s lien law provide a basis for pay-if-paid clauses unenforceable to the extent that they impair lien or bond rights?
On the other hand, Florida law does provide a basis for finding that clauses impairing lien or bond rights are unenforceable.
Florida law precludes a lienor from waiving either lien or bond rights in advance of performing any work. § 713.20(2), Fla. Stat. (2019) states as follows:
A right to claim a lien may not be waived in advance. A lien right may be waived only to the extent of labor, services, or materials furnished. Any waiver of a right to claim a lien that is made in advance is unenforceable.
Regarding bonds, § 713.24(1)(f), Fla. Stat. (2019) states that a “lienor may not waive in advance his or her right to bring an action under the bond against the surety.”
Notwithstanding the law, numerous subcontracts contain language similar to the following:
Receipt of these funds by Contractor shall be an absolute condition precedent to Subcontractor’s right to receive payment […] Subcontractor: (i) agrees that the Price shall be a non-recourse obligation; and (ii) waives Subcontractor’s right to assert any claim, demand, right, or cause of action against Contractor for any portion of the Price.
Other subcontracts contain language, or similar language, to the below clause, which explicitly precludes bond claims:
… receipt of payment by the Contractor from the Owner for the Subcontractor’s Work is a strict condition precedent to Contractor’s obligations to make payment to the Subcontractor under this Agreement, as well as any bond issued on behalf of Contractor and, therefore, no funds will be owed to Subcontractor by Contractor, or Contractor’s surety, unless and until Contractor is paid by the Owner for Subcontractor’s Work. Receipt of payment from the Owner shall also be deemed an express condition precedent to any claim for payment by Subcontractor against any surety bond procured by Contractor and against the surety issuing same.
One of the most egregious examples of an unenforceable payment clause is the following:
Subcontractor […] hereby covenants and agrees not to file any lien or make any claim against the Project […], or file any lien, make any claim […] against any monies due or to become due to Contractor, in accordance with any statute, state or federal, for any cause whatsoever.
Under Florida law, all three of these clauses are at least partially unenforceable. The clause, “the price shall be a non-recourse obligation” is particularly severe, as it requires the subcontractor to agree that it has no recourse of any kind regarding payment. Such language arguably creates an unenforceable illusory contract. See, Pan-Am Tobacco Corp. v. Dep’t of Corr., 471 So. 2d 4, 5 (Fla. 1984) (“It is basic hornbook law that a contract which is not mutually enforceable is an illusory contract.”). More to the point, such a clause requires the subcontractor to give up its lien rights in advance and is therefore unenforceable.
The second example, which makes payment from an owner an express condition precedent to bond claims, is equally unenforceable because it requires a subcontractor to give up its claims against the surety, a clear violation of § 713.24 (1)(f), Fla. Stat. (2019).
The third example is a flagrant violation of Florida law in that it blatantly requires a lienor to abandon all recourse, whether or not guaranteed by state or federal law and whether or not the prime contract provides for recourse.
Contractors have also attempted to circumvent the language of the statute granting the right to a lien by claiming that “no funds will be owed to Subcontractor by Contractor” unless the owner has made payment. Unless price is designated as a non-recourse obligation, which would render the contract as a whole unenforceable, such a statement ignores the distinction between the accrual of a debt (“owe”) and the obligation to make a payment (“due” or “payable”). Performance by the subcontractor creates a debt that is payable according to the terms of the subcontract and if the obligation to pay the debt does not exist but for a condition over which the performing party has no control, we again have an arguably illusory and unenforceable contract.
Can the unenforceable clauses be excised from the contract?
Contracts often contain a “severability” or “savings” clause that allows a court to sever unenforceable provisions from a contract while preserving the validity of the remainder of the contract. However, not all contracts are severable. In Local No. 234 of United Ass’n of Journeymen & Apprentices of Plumbing & Pipefitting Indus. of U.S. & Canada v. Henley & Beckwith, Inc., the Florida Supreme Ccourt held that the unenforceable portion of a contract is only severable if it does not go to the essence of a contract and if, with the unenforceable provision removed, “there still remains of the contract valid legal promises on one side which are wholly supported by valid legal promises on the other.”
Applying this principle to pay-if-paid clauses, it would appear to be a simple matter to remove the unenforceable provisions and thus permit lien and bond claims to go forward. However, some subcontracts are so focused on strengthening the pay-if-paid clause that they include language making the clause a material term of the contract.
It is not unusual to find clauses that require the subcontractor to acknowledge that acceptance of these contingent payment terms is a material inducement to executing the subcontract.” One example reads as follows:
It is specifically agreed by Subcontractor that a material matter of inducement and consideration for the award of this Subcontract by [Contractor], is the Subcontractor’s agreement that it will not look to [Contractor], or its surety, for payments hereunder unless and until [Contractor]has received payment for Subcontractor’s work from the Owner.
Florida courts have held that “material” and “essence” are, in effect, synonymous, observing that “[w]here…lender’s notice letter varies from [the contract] in a way that goes to the essence of the parties’ bargain, the variation is material and the lender has failed to satisfy a condition precedent to the foreclosure action.” Accordingly, one can make a colorable argument that to strike an unenforceable term that is a material inducement in a pay-if-paid clause is to strike at the essence of the contract and render it void in its entirety.
Does the inability to waive bond claims rights operate to negate pay-if-paid altogether?
The inability to waive bond claims has the practical effect of negating pay-if-paid clauses on projects where there is a bond.
However, that does not mean that the pay-if-paid clause is inherently unenforceable. It is unenforceable as to the surety who, upon having made payment to a subcontractor, will seek recovery from the contractor, de facto negating the payment clause. The situation would unfold as follows: a subcontractor demands payment from a contractor, who will claim non-payment by the owner as a defense. The subcontractor then timely files a Notice of Non-Payment pursuant to Section 713.23 (1)(d), Fla. Stat., putting the surety on notice that it has not been paid. Although the surety will likely attempt to assert the defense of non-payment by the owner, it will eventually be required to pay the subcontractor. Because the cost of a surety’s payments or performance is the responsibility of its principal, the contractor, the surety will look to the principal to recover what it has paid out to the subcontractor.
What is the effect of incorporating the direct contract?
Almost all subcontracts incorporate the direct contract by reference. The effect of this incorporation is to make the terms of the owner-contractor contract apply to the subcontract as well. Such incorporation can have unintended consequences for the pay-if-paid terms of the subcontract.
Where a direct contract required a contractor to make payment to its subcontractors in advance of final payment from the owner, and the subcontract contained a pay-if-paid clause, the Florida Supreme Court held that an ambiguity existed, and that “such ambiguity must be resolved against the general contractor.”Moreover, the ambiguity prevented the pay-if-paid “provision from effectively shifting the risk of the owner’s nonpayment from [contractor] to [subcontractor]. [Contractor] thus remains liable for the final payment owed [subcontractor].” . The Fifth district court has also held that “[b]y incorporating the prime contract into the subcontract, the pay-when-paid clause becomes ambiguous,” thus converting a pay-if-paid clause to a pay-when-paid clause, the latter being widely as requiring payment to a subcontractor within a reasonable time.
Contractors attempt to circumvent this by inserting language into the subcontract that raises the statute of the pay-if-paid clause above anything else in the contract documents. One example is the following:
Notwithstanding anything to the contrary contained within any of the Contract Documents, including, but not limited to, Contractor’s agreement with the Owner, receipt of payment by the Contractor from the Owner for the Subcontractor’s Work is a strict condition precedent to [payment to subcontractor].
Such efforts may be of no value in shifting the risk of payment to the subcontractor. If this clause contradicts the terms of the direct contract, an ambiguity still exists, and such ambiguity will be resolved in favor of the subcontractor to create a pay-when-paid clause.
Subcontractors have historically had difficulty receiving payment, and contingent payment clauses have exacerbated such problems. However, it was once much worse. More than a century ago, the Kansas City Court of Appeals was confronted with a case where a subcontractor had entered into a contract that provided for payment outside the time limits for imposing a lien claim on an owner’s property. Therein the court noted that:
[t]he necessary consequences [of a contract that provided for final payment after the time to record a lien had run] would seem to be that, if a party places himself in a position which renders him unable to bring suit to enforce the lien within the time limited, he thereby virtually waives it, having deprived himself by his own voluntary act of the right to enforce it.
Fortunately, the law has substantially evolved since that time. Although contingent payment clauses are enforceable in Florida, they only provide temporary protection to the general contractor, and none to the owner or to the contractor’s surety. Notwithstanding contrary language in a subcontract, an unpaid subcontractor retains the right to record a claim of lien and the right to claim against a payment bond.
Never a Sure Thing: Pay-When-Paid Provisions in Construction Contracts
Given the vagaries and uncertainties these days in loan commitments as well as material prices, not to mention the overall state of the construction industry, one can quickly understand why pay-when-paid provisions have become so critical in construction contract negotiations.
A pay-when-paid provision in a construction contract generally means that a contractor is not liable for payment to its subcontractors until such time as it is first paid by the owner. In the context of litigation, a defense based on a contractual pay-when-paid provision might assert that a plaintiff subcontractor is not entitled to receive payment unless the owner first pays the contractor for subcontractor’s fees, or, alternately, that under the relevant contractor-subcontractor agreement a plaintiff subcontractor is not entitled to receive further payment pursuant to its claims until the contractor is paid by the owner for the fees claimed.
In Florida the general rule is that interpretation of contract provisions relating to conditions and time of payment between a contractor and subcontractors (also called risk-shifting provisions) is a question of law that a judge (as opposed to a jury) may decide on his or her own. The Florida Supreme Court has held that risk-shifting provisions are susceptible to only two possible interpretations: (1) if a provision is clear and unambiguous, it is interpreted as setting a condition precedent to the general contractor’s obligation to pay; but (2) if a provision is ambiguous, it is interpreted as fixing a reasonable time for the general contractor to pay (whether or not it has been paid by the owner).
If a contract does not clearly express an intention to shift the risk of nonpayment, payment provisions will be interpreted as establishing a reasonable time to pay by the contractor (as opposed to creating a condition precedent to the contractor’s obligation to pay the subcontractor). When preparing a contract the burden of clearly expressing an intention to shift risk is on the contractor. This is important because courts will not assume the existence of a pay-when-paid provision in a contractor-subcontractor contract unless it is specifically and clearly expressed in writing by the contractor. The reasoning is that small subcontractors, who need to receive payment for their work in order to remain in business, typically will not assume the risk of the owner’s failure to pay the general contractor.
How does a Surety Bond Factor Into Pay-When-Paid Provisions?
All of the above rules relating to risk-shifting provisions presuppose the existence of a written contract. If the contract in dispute is verbal it is not possible to successfully argue a pay-when-paid defense. Stated differently, in order for a contractor to validly assert a contractual provision which shifts the risk of payment such a provision must be in writing.
Additionally, a pay-when-paid defense is not available to a surety on a contractor-subcontractor contract for which it has posted a bond. The reason that a surety may not assert a pay-when-paid defense is because the surety bond is a separate, distinguishable contract from the contractor-subcontractor contract and, as such, an inability to proceed against the contractor should not prevent recovery on the bond. Public policy concerns also militate against allowing a surety to assert a pay-when-paid defense, because to do so would undermine the statutory scheme under which a subcontractor can seek recovery under a bond as an alternative to employing the procedural mechanism of applicable lien laws.
To be clear, liability for payment to subcontractors, when a contractor has not been paid by an owner, will hinge on a clearly expressed pay-when-paid provision in a written contract. If a contract contains an ambiguous pay-when-paid provision, Florida law will require a contractor to pay its subcontractors within a reasonable time, irrespective of payment by the owner.
Is Payment Due Now, Later or Not At All?
It is customary for general contractors to include pay when paid clauses in their contracts, attempting to limit any requirement on their part to pay their subcontractors until they’ve received payment from the project’s owner. As a result, there have been a number of suits filed by subcontractors against general contractors for payments due on completed work. Can general contractors refuse to pay their subs because they have not yet received payment from their owners?
A recent case has followed a Supreme Court of Florida decision rendered in 1997 and acknowledged the right of parties to shift the risk of payment failure by an owner to a subcontractor. But the Court also recognized the majority rule in this country that payment by the owner to the general contractor is not a de facto condition precedent to the general contractor’s duty to pay its subs.
If a “pay when paid” provision is clear, the general contractor can make payment to his subs contingent on receipt of payment from the owner. However, if the language is susceptible to different meanings then, it must be interpreted as setting a reasonable time for the general contractor to pay. The burden for clear expression is on the general contractor.
In one case, decided against the general contractor, the Court found a provision stating “payment to the subcontractor would be made within 7 business days after receipt of payment from the owner” was unclear and ambiguous. Therefore, it did not shift the risk of payment to the subcontractor, but rather required that the general contractor pay his subs within a reasonable time.
Are Pay-When-Paid Provisions A Matter of When or If?
Shifting the risk of an owner’s possible non-payment from one party to another is neither simple nor guaranteed. Unsuspecting parties can quickly find themselves locked into an agreement containing a payment provision susceptible to conflicting interpretations. What the parties intended, and thought they understood, may in fact not be what they obtain.
A case in point, a subcontractor found itself in the unexpected position of waiting to get paid until the party with whom it contracted was paid by the owner. The center of the dispute involved the interpretation of the following payment provision contained in the written subcontract between the parties.
Article XIII Method of Payment
a) Subcontractor is relying upon the financial responsibility of Owner in performing the Work. It is understood by Subcontractor that payment for the work is to be made from funds received from Owner by Contractor in respect to the Work.
The subcontractor argued that the foregoing term simply fixed a reasonable time for payment by the contractor.[ii] Florida’s Third District Court of Appeals rejected that argument, holding instead that the subject provision plainly and unambiguously made payment by the owner a condition precedent to payment by the general contractor to the subcontractor.
Such payment provisions in construction contracts are commonly referred to as pay-when-paid clauses. While seemingly straight forward at first glance, many are actually ambiguous. The pay-when-paid language can be interpreted on the one hand as establishing a condition precedent where payment must first be received from the owner before it can be paid out to the service provider, or, on the other hand, as simply fixing a reasonable time frame for when payment is to be made.[iv] When interpreted as a condition precedent, the provider will get paid only on the condition that the party with whom it contracted has been paid by the owner. However, when seen as fixing a reasonable time frame for payment, the pay-when-paid language is treated as an absolute, unconditional promise by the general contractor to pay the subcontractor, with the understanding that the payment may be delayed for some reasonable time while the general contractor obtains payment from the owner.
More often than not, a service provider who thought he had secured a definite promise of payment realizes too late that, in fact, no payment will be forthcoming unless the general contractor receives payment from the owner.
Can the intent of either party alter the individual outcome of these cases?
The question is, can the intent of either party alter the individual outcome of these cases? Contrary to what one might expect, when it comes to construing these pay-when-paid provisions, most jurisdictions, including Florida, have precluded the trier of fact from determining what the parties actually intended on a case by case basis.
Ordinarily, the interpretation of a written contract is a matter of law to be determined by the court.[vi] In cases where the terms of a contract are ambiguous, however, the intention of the parties plays a pivotal role in determining which interpretation applies. In such situations, the actual intention of the parties is submitted to the jury as a question of fact. Although this principle of law is applied in most situations, disputes between contractors and subcontractors in reference to ambiguous pay-when-paid provisions are treated as the exception.[viii] That is, the question about what the parties actually intended in such cases is determined a matter of law.[ix] The explanation provided by the Court for its departure from the general rule is based on the supposed predictability and nature of the transaction.
If an issue of contract interpretation concerns the intention of the parties, that intention may be determined from the written contract, as a matter of law, when the nature of the transaction lends itself to judicial interpretation. A number of courts, with whom we agree, have recognized that contracts between small subcontractors and general contractors on large construction projects are such transactions. The reason is that the relationship between the parties is a common one and usually their intent will not differ from transaction to transaction, although it may be differently expressed.
That intent in most cases is that payment by the owner to the general contractor is not a condition precedent to the general contractor’s duty to pay the subcontractors. This is because small subcontractors, who must have payment for their work in order to remain in business, will not ordinarily assume the risk of the owner’s failure to pay the general contractor.
Such reasoning was drawn from a case where the written contract required the general contractor to make payment to its subcontractors within thirty (30) days after completion of the work included in this subcontract, written acceptance by the Architect and full payment therefore by the Owner.
Based upon a finding of ambiguity in this payment provision, the Florida Supreme Court held, as a matter of law, that payment by the owner was not a condition precedent to the subcontractor’s right to receive payment. This case, Peacock Construction Co. v. Modern Air Conditioning, Inc., while still good law, does raise some interesting issues. Because the Court was apparently focusing on contracts between small subcontractors and general contractors on large construction projects, then is one to assume that the Peacock precedent need not apply to disputes arising from small construction projects? And what exactly is the definition of a A large construction project? If applied as a bright line rule to all transactions between contractors and subcontractors, however small they or the construction job might be, then isn’t the Peacock rule unfairly favoring one party over the other? Unfortunately, the reported cases over some twenty years that have followed Peacock have yet to address these issues.
The Court in Peacock did recognize that nothing prevents parties from shifting the risk of an owner’s nonpayment provided the contract expressly and unambiguously states such intent. The burden of clear expression is on the party seeking to pay only when paid,[xiv] and any ambiguity will be construed against it as a matter of law.
What complications should I look out for when dealing with a Pay-when-paid issue?
A complication occurs where the general contract and accompanying general conditions between the owner and the prime contractor are expressly included as part of any subcontract. If any inconsistency exists between these two contracts, then an ambiguity has been created,[xv] since it is a generally accepted rule of contract law that, where a writing expressly refers to and sufficiently describes another document, that other document, or so much of it as is referred to, is to be interpreted as part of the writing. In one instance, even though a cost plus or reimbursement type contract required a general contractor to pay its subcontractors before the owner reimbursed it, the owner’s general conditions required that before final payment became due, the general contractor was to submit an affidavit certifying that all subcontractors had been paid. This inconsistency was construed against the general contractor.[xvii] The Court found that when that provision of the subcontract was read in conjunction with the general contract and its conditions, a sufficient ambiguity existed which prevented the general contractor from effectively shifting the risk of the owner’s nonpayment to its subcontractors. To its dismay, the general contractor remained liable for the final payments owed to its subcontractors.
The bottom line is that risk shifting requires clarity, consistency within all of the documents in a transaction, and a knowledge of the law governing payment provisions in construction contracts. pay-when-paid clause, if intended to create a pre-condition to payment, as opposed to a reasonable time frame when payment will be made, must be free of any ambiguity and must establish by its express terms that payment by the owner is a condition precedent to any requirement on the part of one party to pay the other. By way of example, this provision has been held not to be a contingent payment clause:
Under no circumstances shall the contractor be obligated to pay the subcontractor until funds have been advanced by the owner.
The court also rejected a contractor’s argument that the following subcontract term shifted the risk of the owner’s nonpayment or delayed payment to the subcontractor:
Subcontractor shall be entitled to receive all progress payments and the final payment within ten working days after contractor receives payment for such from the owner, except as otherwise provided in the conditions.
However, the following cited definitive provisions have been upheld:
A Final payment, inclusive of retention, shall be made within thirty (30) days of completion of the construction project, acceptance of same by the owner, and as a condition precedent, receipt of final payment of subcontractor from the owner.
When all work has been finally accepted by the Architect and…, final payment is contingent upon payment to the Contractor and shall be made within thirty (30) days after said payment from the Owner, provided the Subcontractor has previously furnished complete releases of lien and evidence of paid material bills.
Sureties are also not immune from this predicament. They may find out too late that the language set forth in their bonds may not be sufficient to protect them from claims by subcontractors for payment. Often, payment bonds furnished by a surety to a contractor contain the legend specified in section 713.245, Florida Statutes, for conditional payment bonds (bonds which condition payment to a subcontractor upon payment to the contractor):
This bond only covers claims of subcontractors, sub-subcontractors, suppliers, and laborers to the extent the contractor has been paid for the labor, services, or materials provided by such persons. This bond does not preclude you from serving a notice to owner or filing a claim of lien on this project.
Although the form of bond may comport with the statutory requirements, the bond will, nevertheless, be treated as a payment bond under section 713.23, Florida Statutes, as to lienors having no pay-when-paid clause in their subcontract. While it has been asserted that the bonds must be deemed conditionally restricted because they contain the above statutory legend limiting coverage to instances where an owner has paid the general contractor, this argument has been rejected in light of the first sentence of section 713.245(1), which reads:
Notwithstanding any provisions of ss. 713.23 and 713.24 to the contrary, if the contractor’s written contractual obligation to pay lienors is expressly conditioned upon and limited to the payments made by the owner to the contractor, the duty of the surety to pay lienors will be coextensive with the duty of the contractor to pay…
Recognizing that the protection of section 713.245 does not arise unless express conditional payment language is contained in the general contractor’s actual subcontract, it has been held that the mere presence of such 713.245 language within a bond will not free the surety from having to pay up when its principal’s underlying contract did not contain express and unambiguous contingent payment language.[xxiv] In the absence of such conditional language, and provided the bonds comply with section 713.23, they will be considered, construed, and applied as unconditional 713.23 bonds.[xxv] Thus, under the present statutory scheme, a surety shall be liable to the same extent as the contractor.
Too often, more time is spent bidding a project than actually reviewing the agreement which formalizes a party’s selection to perform the work. As often, pay-when-paid provisions are not discovered or really understood until the parties are well into a job. By then, it is normally too late and too costly to do what could have and should have done at contract negotiation.
Get Paid Even if You Have a Pay-when-Paid Provision
A pay-when-paid (or pay-if-paid) contractual provision exists in almost every construction contract you are asked to sign these days. A pay-when-paid provision is a contract clause that shifts the risk of nonpayment from one party to another. As an example, with such a provision in place in a subcontract agreement, if the owner doesn’t pay the contractor, the contractor doesn’t have to pay the subcontractor. This is a legal defense to payment. It’s valid and enforceable in Florida and it’s important to understand that a pay-when-paid provision can mean you may not be paid.
In Florida, pay-when-paid provisions are enforceable if they include certain language. Generally, it’s the inclusion of certain words such as, “condition precedent” or “contingent upon”. If those phrases are within the pay-when-paid provision, more often than not, the pay-when-paid provision will be found to be valid and enforceable.
How do you deal with these risk shifting clauses?
Consider these three factors:
1. Strike the provision.
Unfortunately, in this economic climate, it can be very difficult to do so. However, you may be able to strike some of the language which could render the provision unenforceable.
2. Take a look at the prime contract.
Most prime contracts are incorporated into your subcontract or sub-subcontract. If so, the prime contract may contain provisions that will void an otherwise valid and enforceable pay-when-paid provision.
3. See if the job has a bond.
If the contractor posted a performance and payment bond on your job, even if there is a valid and enforceable pay-when-paid provision in your contract, you may be able to make a claim against the contractor’s payment bond.
Be aware that even if you have a pay-when-paid provision in your contract, your lien rights may have survived and still be intact. And while you may not be able to overcome a pay-when-paid provision in your contract, it’s important to at least understand the associated risks.
Extending credit gives you an advantage over your competitors and increases sales. While this is very beneficial, especially in the construction industry, it doesn’t come without some risk. Extending credit creates a financial exposure for you, and this may need to be absorbed if things don’t go well. Not everybody to whom you extend credit will always pay on time or, unfortunately, at all. It’s always possible that the job where you extended credit or delivered materials goes into bankruptcy or foreclosure. So, understand when you extend credit, you are taking a big risk. In this article, we will discuss different ways you might secure your rights to get paid, the most important of which will be through personal guarantees.
A personal guaranty is a written promise from an individual to pay the debt of a business. For a personal guaranty to be most effective, it should include the signatures of both husband and wife. This is important because, in Florida, the liabilities of one spouse are not automatically the liabilities of the other.
Here is a practical example. We had a client who supplies windows and doors. Unfortunately, they did not secure their lien rights, but they did have a personal guarantee from the husband/owner of the company. So we filed the lawsuit and obtained a favorable judgment against the husband. We garnished his bank account, and there was ample money there to satisfy the debt. Great, you would think, but unfortunately, the account was held jointly by the husband and his wife in what’s known as tenancy by the entirety. As a result, even though there was enough money in the account and the personal guarantor (the husband) was a joint owner of the account, none of the money – not even half of the money or a portion of the money – was available to satisfy the judgment.
Understand that while a personal guarantee is good and definitely better than not having one, there are limitations in what you can do if you don’t have the spouse on the guarantee as well. So, if you really want to protect yourself, then you need the guarantee of both the husband and the wife.
Also, note that the guarantee should not be conditioned on the business not paying you. You don’t want to be limited in going after the guarantor only if the business doesn’t pay the debt. You don’t want to have to exhaust your remedies against the business before going after the guarantor. You should write the personal guaranty to make it very clear that each of the parties, the company and all of the guarantors, are jointly and severally liable, meaning you could go after the guarantor directly.
Another thing you need to know is that it can include all of the debts incurred even without the guarantor’s consent on the debt. Here is an example of that. We once represented a supply house that had a personal guaranty against a business and one of the partners. The partner sold his interest in the business and left the business but didn’t remove himself from the guaranty. The business continued to accrue debt. When we filed the lawsuit against the business and the guarantor, the partner that left wasn’t let off the hook because he didn’t cancel his guaranty when he left. So be aware of that; just because someone leaves the business doesn’t automatically mean that he is off of the guaranty.
A corporate guaranty is very similar to a personal guaranty. The only difference being that it is given from a business and not from a person. Whenever you request a corporate guaranty, always ensure that the guaranty is from a business better off than the business to which you’re extending the credit.
If the businesses are affiliated and so intertwined that if one fails, they both fail, you may not be getting much additional value. The ideal corporate guarantee is that from a completely separate and financially solvent entity.
Joint Check Agreement
A joint check agreement is a written promise, usually from the general contractor to directly pay a sub-subcontractor or supplier. A joint check agreement is governed by its terms. There is no such thing as a universal joint check agreement. This means that there are some joint check agreements that are really good for you, and there are others that are not so good. You have to read them and negotiate them like you would any other contract.
Most contractor-drafted joint check agreements provide very little protection for you as a supplier or a sub-subcontractor. Take time to draft your own form of joint check agreement and always ensure that your version of the joint check agreement is what is signed. Start negotiating from your form of joint check agreement rather than the general contractor’s form of joint check agreement.
What happens if the joint payee refuses to sign the joint check? A joint check is a dual-payee check. It lists a subcontractor and supply house on the payee line of the check, and unless the counterparty to the joint check is willing to endorse the check, you still don’t have the right to be paid. You can address that issue by requiring the contractor or subcontractor to obtain the joint check, and if the joint payee on the check refuses to sign it then, you can have in the joint check agreement that the contractor upon notice from you will issue a single party check for the amount you are owed.
Sometimes, the joint check payee, as a means to exert leverage on the downstream sub-subcontractor or supply house, may dispute the amount on the check in a bid to get it reduced. So, because their signature is the trigger that releases the funds, they sometimes use it as leverage to effectively renegotiate the deal. You need to be prepared for that in advance and address that in the joint check agreement.
Construction lien and bond claim
A lien encumbers the property you are working on or provide materials to, and a notice of non-payment or bond claim will encumber the contractor’s payment bond on the project.
You need to send a notice to owner no later than 45 days from your first work. To put it in a much clearer term, the owner or the contractor needs to receive the document no later 45 days. So, you need to send it much sooner than the forty-fifth day. If you put it in the mail on the forty-fifth day, it’s already too late. If you use a notice to owner service, they send it with a manifest stamped at the post office before the fortieth day. With this, the notice is considered good and delivered under the law whether or not the owner or the contractor receives the document.
You need to record your claim of lien or serve your Notice of non-payment no later than 90 days after your last work. Again, the ninetieth is the absolute last day from your last work or last delivery of materials. And it does not include warranty work. I would recommend you start the process at about 60 days after your last work. Give yourself a lot of time to get the paperwork ready, to sign the documents, and to have them served so that you won’t be rushing at the last minute.
Finally, you need to file a lawsuit to foreclose your lien within one year from the recording date of the claim of lien or within one year of your last work on a bond claim. You have a little less time to sue on a bond claim than you do on a lien claim.
Know that subguard is not a protection for you as a subcontractor, sub-subcontractor, or supply house. Subguard protects the owner and the contractor. So if you are working on a job with subguard and the contractor doesn’t have a bond, know that your rights are on the lien that you may assert on the property. Subguard does not protect you. That’s a common misconception. Subguard is an insurance product to protect the owner and the contractor in case a subcontractor can’t finish the job. It is not like a payment bond on the job. So don’t be fooled.
So you can see, the best way to reduce your risk is to obtain that personal guaranty. It can make a significant difference on whether you get paid.
Guaranty Agreements: Fueling Today’s Financial Transactions
Most business dealings have traditionally been supported by guaranty agreements; however, recent economic challenges are regularly testing the validity and enforceability of such promises. With defaults running rampant on all fronts, severely impacting global financial markets, it is clear that a better understanding of these instruments is in order.
Essentially, a guaranty is a promise to answer for the payment of another’s debt or the performance of another’s obligation, generally triggered if and when a default occurs.There are different types of guaranties – general, special, conditional, absolute and continuing – each with very different protections and requirements.
Essentially, a guaranty is a promise to answer for the payment of another’s debt or the performance of another’s obligation, generally triggered if and when a default occurs. There are different types of guaranties – general, special, conditional, absolute and continuing – each with very different protections and requirements. A general guaranty is enforceable by any party to whom it is given while a special guaranty is one addressed to a particular company or person. A guaranty which attaches no conditions relative to enforcement is absolute; one which is not enforceable until certain conditions are met is conditional. Whether general or special, absolute or conditional, most guaranties are continuing, meaning they’ll remain in effect until specifically revoked.
Though it may appear easy enough to label these often found tools of financial commerce, it is not practically so. When determining the enforceability of a specific guaranty and against whom it may be enforced, it is always important to review the language used in documenting the original promise in light of the actual circumstances surrounding the making of that particular guaranty.
Years of litigation involving guaranty agreements have provided instruction on the proper wording for and the likely enforcement of guaranties. For example, to qualify as a general guaranty and fall outside the limitations of say, an assignment, (a not uncommon occurrence today), a guaranty should include terms such as “successors and assigns” following the name of the party to whom the guaranty is given. Another commonplace development may be where a creditor, who obtains a special guaranty when extending credit to a borrower, subsequently sells its business and assigns the guaranty to the buyer. Credit is then extended by the buyer to the same borrower. What happens when it is discovered that the borrower has actually defaulted prior to the assignment. Is the guarantor still liable? Courts have determined that, yes, the buyer in this circumstance could recover from the guarantor but only those amounts due to the original creditor prior to the assignment. Extensions of credit given to the borrower subsequent to the assignment would not be the guarantor’s obligation.
Sometimes the promises are more in the nature of a guaranty of collection, with no liability being incurred until after a creditor or lender has exhausted all efforts to collect a debt from the principal debtor. This is a conditional versus an absolute guaranty, the latter becoming immediately effective upon the primary obligor’s default.
From a lender’s perspective, the ideal guaranty will always be continuing, meaning that no matter what, the guarantor will remain on the hook for the debt. This may be especially troubling for some, like a divorcing couple who may have in better days both signed a continuing guaranty. There are cases holding that even when a husband incurs additional debt after a divorce, and then subsequently files for bankruptcy, the wife may be found liable for the entire debt. In most instances a creditor holding an absolute and continuing guaranty signed by multiple individuals or entities, jointly and severally, doesn’t have to notify any of them of an underlying default before enforcing the guaranty it may be holding against any one of them.
What Should Guaranty Agreements Look Like?
Most all guaranties requested by financial institutions need to be general, absolute, unconditional and continuing. They are therefore drafted accordingly. It will not only be the guarantor that is named but as well all heirs, successors and assigns. Preconditions to enforcement will be eliminated so that there is no requirement to first proceed against any primary obligor before suing the guarantor. As well, presentment, notice and demand along with any advice on dishonor of the underlying obligation shall be specifically excluded as conditions precedent to proceeding against the guarantor. All are steps meant to clear the thicket of objections which may be interposed by reluctant guarantors.
Guaranty agreements are here to stay, having become as common as the promissory notes and loan documents to which they are now regularly affixed. Clearly, the more detailed and specific a guaranty agreement can be, the less likely there will be any confusion when it comes to enforcement. Of course, every lender wants a guaranty written such that it can pursue as many parties as possible, while every guarantor hopes to limit the occasions where its guaranty is called, but each may have to settle for a less predictable result if the promise they hold wasn’t drafted carefully, intelligently and properly.
Recovering from lenders
What happens when a borrower has earmarked portions of a construction loan for specific purposes but those designated funds are then subsequently disbursed by the lender for another purpose?
Florida statutes require that where there is a loan with “designated construction loan proceeds,” the borrower may not authorize the lender to disburse such designated funds for any other purpose unless and until written notice of that decision (including the amount of the designated proceeds that will be disbursed differently) is properly served on the contractor and any other lienor, materialmen or subcontractor who has provided the borrower a Notice to Owner. The term “designated construction loan proceeds” is defined in the statute as that portion of the loan allocated to actual construction costs of the facility, not including allocated loan proceeds for tenant improvements where the contractor has no contractual obligation or work order to proceed with such improvements. If this required notice is timely given and the decision is otherwise permitted under the loan documents the lender is not liable to the contractor for the reallocation or disbursement of the designated loans proceeds. So, for example, if an entire loan, including amounts which the borrower may designate for pre-development work, is fully funded but there are contractors who are not paid in full for their pre-development work, those contractors may have a claim if the notice to reallocate the designated construction loan proceeds for pre-development work was never provided to them by the borrower as required.
Furthermore, the statute provides that if the lender is permitted under the loan documents to make disbursements from the loan contrary to the original loan budget without the borrower’s consent, the lender becomes responsible for serving such notice on the contractor and other lienors. A lender which fails to provide this mandatory notice prior to disbursing the designated construction loan proceeds, including amounts earmarked for work other than that originally budgeted, could be exposed to liability.
Can a Contractor Waive Their Right to Receive?
A contractor or other lienor may not waive this right to receive notice under this statute; however, the statute referenced only applies to residential projects greater than four (4) units and to construction loans greater than $1 million (unless the lender has committed to make more than one loan, the total of which loans are greater than $1 million). As well, neither the owner nor lender is required to give notice to the contractor or any other lienor unless the total amount of funds improperly disbursed by the lender of the designated construction loan proceeds exceeds 5% of the original amount so designated or $100,000.00, whichever is less.
The statute does goes on to state that any disbursement of loan proceeds contrary to this subsection (ie: distributing designated construction loan proceeds for another purpose and failing to give the required notice) renders the lender liable to the contractor (for the lesser of either any such disbursements or the actual value of the materials and direct labor costs plus 15% for overhead and profit.
The contractor shall have a separate cause of action against the lender for damages sustained as a result of the disbursement of loan proceeds in violation of this subsection and this action cannot be used to delay any foreclosure action filed by the lender, may not be the basis of any claim for equitable subordination of the mortgage lien and may not be asserted as an offset or a defense in the foreclosure case.
Lender liability is a very real risk when a lender alters the disbursement scheme of designated loan proceeds, especially when such modification is done contrary to the noted statutory mandates.
Taking back materials from the job site
If for any reason a project is abandoned, can you take back materials from the job site? Lien holders, who have delivered materials for improvements which have not been incorporated and for which they have not been paid, may peaceably repossess such materials. That lien holder however, will then no longer have a lien on the real property or improvements and shall have no right against any person for the price of the materials. This right to take back materials from the job site shall not be affected by their sale, encumbrance, attachment, or transfer from the site, except if the materials have been transferred to a bona fide purchaser.
The right to repossess and remove shall extend to materials whose purchase price does not exceed the amount due to the repossessing lienor. If the materials have been partly paid for, the person delivering them may repossess the materials upon refunding the part of the purchase price which has been paid. The recovery of materials under Florida’s lien law should not be considered a preferential transfer under the Bankruptcy Code and should not be voided. As well, materials on a construction site which are about to be incorporated into the realty are immune from levy, execution, or attachment by the material supplier’s creditors.
Preferential transfers – bankruptcy
Stay in business long enough and you will inevitably become a creditor in someone’s bankruptcy – a disappointing development made worse when you receive a demand from the Trustee’s counsel asking for the return of a payment you recently received from the bankrupt debtor. Before you ignore the claim, believing that since you are actually entitled to the funds you can simply keep them, be aware that money paid by a bankrupt debtor or by third parties (but passing through the hands of an insolvent entity or person) may be challenged as a preference and may be subject to forfeiture.
Section 547(b) of the Bankruptcy Code seeks to protect a debtor’s assets before bankruptcy so as to provide all other creditors an opportunity to share fairly in the bankruptcy estate (debtor’s property). This way, there can be no preferred creditor receiving more than they would otherwise be entitled to, had they waited for the equal distribution of the debtor’s assets as provided for under the bankruptcy code. Therefore, under certain circumstances, if money is paid to a creditor within the preference period (90 days preceding the bankruptcy unless the creditor receiving the payment is an “interested party” at which point the preference period is one year) it may be viewed as a preferential payment and subject to avoidance. Stated differently, the concept behind 547(b) is to prevent a debtor, who has a limited number of assets to satisfy his debts, from paying certain preferred creditors (those that he may wish to do business with in the future) prior to filing bankruptcy. This generally leaves remaining creditors with substantially less than what the preferred creditors received.
Of course, not every disbursement of money by the debtor can be reclaimed by the Trustee as a preference. There are several defenses to such claims, with the most popular being that the payment was made in the ordinary course of business. This defense, as the name implies, essentially provides for the avoidance of a preference claim by the Trustee when the monies paid to the creditor, although paid within the preference period, were transmitted in the ordinary course of business. Of course, it becomes more complicated when the subject creditor has a history of paying late, or if in their particular industry the parties are used to paying for goods and services in a belated fashion.
Another factual scenario which may arise, especially in a construction setting, is where the payment received actually originates not with the debtor but rather with a third party. When properly applied, this “earmark doctrine” prevents a transfer from being avoided as a preference (and monies received from having to be returned). A third party makes a transfer of its property, either directly to the debtor’s creditor or to the debtor with the agreement that the property transferred be used by the debtor to pay the creditor. The very essence of the doctrine is to protect not only the creditor but the third party who is paying the obligation.
Bankruptcy Claims In a Construction Context
In a construction context, the third party may be an owner attempting to prevent the imposition of a potential lien that could cloud title to his property. He might therefore decide to issue joint checks listing both the general contractor and each sub as payees, even though each check is delivered only to the general contractor. Everything runs smoothly until the general contractor ends up in bankruptcy a few weeks later and the Trustee goes after the subcontractor for the monies paid through the owner’s joint check. The Trustee will claim that the money was the property of the now bankrupt general contractor and must be repaid to the estate. The recipient of the funds (the subcontractor or the materialman) will in turn claim that this money was actually owed to them and was in fact paid by the owner, simply passing through the general contractor before reaching the ultimate payee, themselves. In situations like this, the dispositive element is the debtor’s control, or lack thereof, over the transferred funds. When a third party issues a check on the condition that a specified amount be given to an interested creditor, and the creditor has been designated as a joint payee, bankruptcy courts in Florida have determined that the debtor has no control over the application of the funds and therefore, such funds were never property of the debtor (or in our example, the general contractor).
The earmark doctrine rests on the theory that the amount designated to the creditor never became an asset of the debtor’s estate, as the debtor could never exercise control over the funds and utilize them at the debtor’s discretion. Specifically, an implied condition for the debtor’s receipt of the funds is that the debtor pay them over to the creditor. This lack of control has been used by courts to reach the conclusion that the money was never property of the debtor in the first place; thus, any transfer of the money is not a transfer of the debtor’s property which can be subjected to a Trustee’s preference claim.
Subcontractors and materialmen may do well to consider such an approach upon the hint of a bankruptcy by the general contractor. A joint check, in this instance, could make the difference in actually getting paid.
Price adjustment clauses
A key factor for a contractor to consider in pricing its goods and services at an amount that is both palatable to the purchaser and profitable for the contractor is an astute evaluation of the underlying costs and any expected increases. Accuracy in evaluating and forecasting these figures is important because even a minor deviation could effectively render a profitable contract unviable. Of course the problem facing contractors is that a construction contract may cover a project spanning several years during which unforeseen circumstances, both micro and macroeconomic, may result in increases to costs that were completely unexpected at the time the contract was originally executed.
For example, in 2004 the price of steel rose 50-60% as opposed to prior years when it had remained flat or had even decreased. In 2005 the price of asphalt jumped 40% despite there only having been an increase of 4% over the course of the two preceding years. In addition to such dramatic increases in material costs, the construction industry has also been significantly impacted by the volatility and overall increase of fuel costs. The result is that contractors are left with no choice but to abandon those jobs that have been rendered untenable. This, in turn, has lead to the unfortunate fracture of sometimes long established business relationships and the onslaught of litigation. In an effort to avoid such a turn of events, more and more contractors are incorporating “price adjustment clauses” in their contracts.
These clauses take into account the current volatile nature of both materials and fuel costs and allow for a certain degree of flexibility as a response mechanism to price fluctuations over the course of a construction project.
Three types of such adjustment clauses are generally considered and used to determine what triggers a price adjustment:
Price Adjustment Methods to Consider
This requires the contractor to produce documentation reflecting any increase in materials costs which may have occurred between the time the contract was signed and the time that the materials were actually purchased, passing same on to the owner.
Under this sort of price adjustment clause, certain material costs are tied to an index for that applicable commodity, allowing the contract price to fluctuate in accordance with any regional or local changes to the price index for that commodity. Contractors should be aware that unlike the invoice method (which passes on increases in costs), the index method can result in a loss (when the cost of materials decreases).
This combines the invoice and index methods and is based on a “certified bid cost” where the contractor certifies its estimate of the costs of certain materials and/or fuel based on current supplier prices or an index price listing. If the certified bid cost changes by a pre-set percentage, the contract can be adjusted accordingly.
In the end, what contractor isn’t interested in protecting its profits, preserving its business relationships and preventing litigation? When drafted properly and equitably, price adjustment clauses can provide contractors some of this protection. Rather than solely bearing the burden of unforeseen and sometimes dramatic cost increases, contractors can look to share the risk as well as the possible benefits.
Anyone regularly reviewing construction contracts will come across those dreaded liquidated damage clauses. They require contractors, and in turn subcontractors, to make significant payments to compensate for late completion of work – $100-$500-$1,000 per day wouldn’t be unusual. But are these big dollar payment demands enforceable?
Most of these clauses are written with standard disclaimers. They state that actual damages will be difficult if not impossible to determine if there is a breach. So let’s agree in advance to a number, and let’s also agree that this is not a penalty. Why is this language incorporated? Simple. The owner and the general contractor want to preempt the potential defenses that could be raised when damages are assessed. However, these attempts to make their liquidated damages stick may not always work.
If the amount “agreed” on by the parties is unconscionable and just too high, a court could reject it as an unreasonable assessment. Also, just saying something is not a penalty isn’t necessarily enough. The facts of each case will determine that, and circumstances showing that someone was coerced into agreeing could well negate the assessment of those damages.
As well, liquidated damages can often be defeated if it can be shown that the one being assessed these damages was not the sole cause of the delay. As we all know, in construction, it is not uncommon to have multiple parties contribute to any late completion on a project.
For sure, try to strike or significantly limit the liquidated damage language in any contract you sign. If that doesn’t work, all is not lost. Enforcement is never a sure thing and seeking the advice of a board certified construction law expert should be your next step.
Can I stop work if I’m not being paid?
In this article, we will discuss in detail the answer to one of the most common questions we receive in our construction law firm, if I’m not getting paid, can I stop working, and if I do, how do I get paid? To determine whether or not to stop working if you are not getting paid, you need to consider the following.
- What does your contract say about stopping work?
- What is the status of the work and the payments on the job at the time you want to stop working?
- Does your contract have a pay-when-paid provision?
- Do you have lien or bond rights?
- Are you ready to take the plunge and suffer the possible adverse consequences?
What does your contract say about stopping work?
Your contract may just be a handshake, a purchase order or a simple one-page agreement, so it probably says nothing about stopping work. Work stoppage provisions are most often found in those longer and more significant contracts usually on larger jobs. Most sophisticated contracts address work stoppage as a specific issue as seen in the sample below.
“In the event of a dispute as to whether any item or portion of the work is within the scope of the work to be performed by Subcontractor or any dispute as to whether Subcontractor is entitled to an extra payment or additional time, Subcontractor shall continue to proceed diligently with the performance of the work, this subcontract and any disputed work, pending any resolution. The existence of a dispute shall not be grounds for any failure to perform by subcontractor.”
This means that if you sign a contract with this language, you have agreed in advance that you’re going to follow the dispute resolution process that exists in the contract and that stopping work is actually not available to you as an option. You need to look out for this when you are negotiating your contract. According to such a provision, you need to keep working even though you may not be getting paid. You cannot stop work even in a situation where you have to undertake mediation or arbitration or maybe even file a lawsuit to resolve the dispute.
If you don’t have a written agreement, or your agreement doesn’t explicitly prevent you from stopping work, you may be able to stop work. This doesn’t mean you absolutely can stop working if you don’t have this provision. It just means that your analysis can continue to determine whether or not it’s the best thing for you. Let’s take a quick look at a provision you can include in your contract as you negotiate your contracts in the future so that you have the explicit right to stop work. This is called a “stop work” provision. It would not necessarily exist in a contract given to you. It would more likely be something that you would have to add to your contract.
“Subcontractor can slow or stop work, without liability or penalty, if it has not been paid its draw request 30 days after submission.”
While this provision doesn’t give you the immediate right to be paid, it stops the bleeding so that you don’t have to work if you’re not getting paid. As you review and negotiate contracts in the future, consider adding a provision like this so that you can stop working if you’re not getting paid.
What is the status of work and payment on the job at the time you want to stop working?
Most of the time, when clients come to us, they’re owed money and want to stop work. However, it’s possible that they may want to stop work because of other reasons. For instance, they may fear that they will not be getting the rest of their money. Or maybe the job is just taking too long, and you don’t want to continue the work. But ask yourself, have you been paid for labor or materials that you haven’t yet furnished. When you analyze the payments made on the job, have you received more money than the labor or materials provided to the project? Where this comes into play most often is when you have received deposits for materials that may remain on order. Maybe you are a windows subcontractor, and you’ve received fifty percent down payment for the windows, but the job turns sour and you don’t finish your work. In this scenario, you’ve effectively been overpaid because you haven’t yet provided the windows. So if you decide that you want to stop working in this scenario, you need to account for this overage.
What about your subs and suppliers, do you owe them money? If you stop working, what’s going to happen to them? Are they going to be coming after you to get paid? Your subs and suppliers may have lien and bond rights, making you responsible for their payment. Ideally, your subs and your suppliers should be lined up with you as you make your case against the owner or general contractor.
Have you given any personal guarantees to your subs and suppliers? Part of the analysis of determining whether or not you should stop work is understanding the risks associated with you stopping work. It may be worse for you to stop working than it is to continue to try to finish the job and get paid. If you have personal guarantees with your suppliers and you’re not getting paid after you stopped working, your suppliers will be coming after you personally.
Do you have a bond on the job? You may have given your own payment and performance bond to the contractor and owner, especially on larger jobs. If you stop work in such a case, your surety may receive notice from the contractor making a claim on your performance bond. That may impact you significantly on other jobs. A performance bond claim on your surety is something that should not be undertaken lightly.
Does your contract have a pay-when-paid provision?
The next thing you need to look at is whether or not your contract has a pay-when-paid provision. Are you not getting paid by the contractor because the contractor hasn’t been paid by the owner? If that’s the case, do you have a pay-when-paid provision in your contract? More likely than not, you do. These days most contracts do. The next question is, is it a valid and enforceable pay-when-paid provision? That analysis comes down to determining whether or not the pay-when-paid provision has the right language.
Here is one example:
‘Payment from the owner is a condition precedent to payment to subcontractor.’
The highlighted words ‘condition precedent’ are what make this provision enforceable.
Another example is:
‘Payment to subcontractor is contingent upon contractor receipt of payment from the owner.’
Here, this provision is likely unenforceable.
Understanding whether or not you have an enforceable pay-when-pay provision is important because you may have no legal right to stop working. Doing so in the face of an enforceable pay-when-paid provision will constitute a breach of your contract.
Do you have lien or bond rights?
As you may know, a construction lien is a legal right available to those that provide labor and materials to a project. It essentially gives you the ability to sell the property upon foreclosing your lien. Any equity from that property is going to be used by the court, if you prevail, to pay the unpaid lienor. For instance, if you are a subcontractor or supplier on a project, and you record a lien and prevail, the property will be sold. At the sale, all that equity (if there is a mortgage on the property, it would be paid first) would go to pay you and any other lienor that asserted a claim, and whose claim has been determined to be valid.
You may also have rights against the contractor’s payment bond. Payment bond is similar to your rights under a lien except instead of the property that is being encumbered, it is the contractor’s payment bond surety.
Filing requirements for a lien or a bond in Florida
Within no later than 45 days from your first work on a project, the owner and contractor must receive your notice to owner.
Next, within 90 days of your last work on the project (no later than 90 days), you need to record your claim of lien in the county where the project is located. Or if you have a claim against a payment bond, the surety and contractor need to receive a copy of that notice of non-payment by the ninetieth day. Remember these days are the outside time periods.
Ideally, you should undertake these steps at least a week before the actual deadline so that you have enough time, in case the mail gets delayed or there’s a problem getting everything together in your office.
Lastly, no later than one year from your last work on a bond claim or one year from the recording date of the claim of lien, you need to enforce your rights in court on the lien or bond. I would recommend that if you’re owed money and you don’t have a business reason to wait (such as having other jobs with this contractor or this owner), you should be taking action to collect the debt anywhere from 30 to 90 days after you send your notice of non-payment or after you record your lien. Waiting beyond that isn’t going to make your case any better. It probably is going to make it worse. Project managers may move from company to company, documents may get lost, memories fade; so the sooner you decide to take action, the more likely it is that you will get paid. If you decide to walk off a job because you haven’t been paid, you will surely increase the likelihood of getting paid by timely asserting your lien and bond rights.
Are you ready to take the plunge and walk off the Job?
You should consult with a construction attorney first before walking off a job. A construction attorney can review the pros and cons associated with walking off the job. While we have been going over generalities in this article, remember every contract is different and every situation unique. You don’t want to find yourself in a worse place because you decided to walk off the job. So, consult with a construction attorney first to understand the risks and benefits of walking off.
Once you decide that you’re going to do it, use the opportunity before you walk off the job ( as you may not get access back to the site) to document what is happening on that site. What are the things holding you up on that job? Document them. Take lots of pictures, videos, and send written notices or even emails to necessary parties. Don’t wait till the last moment. Ensure that the documentation has been progressing through the course of the job so that you can tell a story of what happened on the job and why things outside of your control were negatively impacting your ability to do your work.
Remember that part of protecting your rights to get paid is building your case during the course of construction. Send regular notices, pictures, and emails to the contractor, subcontractor, or the owner indicating what’s happening on the job. If you wait until the very end, it looks like you’re just complaining. But if you do it over a longer period of time, you can tell a much better and more convincing story.
If you are the bonded contractor, you need to make sure that you notify your surety before you walk off the job. This is because one of the things that will likely occur is that your surety will receive a notice from the contractor or the owner. Let them know that you’ve spoken with a lawyer that you’ve documented the issues on the job, and that it’s in your best interest to walk off. This should be done so that you can get their support and that there are no surprises.
If you decide to pull the plug, get ready for the fallout because things will very likely become more complicated. In many instances, it’s a game of chicken – who’s going to crack first. A better understanding of all your options and possible consequences will surely make you better prepared.
Won judgment: how do I get paid?
The term “judgment” sounds final. But in the law, winning a judgment is just the first step in getting paid. Your next move is turning that judgment into money.
What is a judgement?
A judgment is a court order that gives you, the creditor, various rights to a judgment debtor’s property. Only the people who are named in the judgment are subject to it. Related companies or relatives of the judgment debtor are not automatically connected to the debt.
It takes time and effort to collect on a judgment. The good news is that any fees you spend pursuing payment of the judgment should be collectable. The bad news is that it can take quite a while to see any real money. A judgment lasts for 10 years, and can be renewed for another 10 years, for a potential total of 20 years. This is a long time, so you have plenty of opportunity to collect on it. Your debtor may not have money now, but he may in another few years.
Is there a difference between a judgment and a claim of lien?
The distinction between a judgment and a lien claim is worth noting here. A lien is an encumbrance on real property that allows you to foreclose on that property and get paid when that property is sold. You may not be the only one with a lien, however. A lien has the priority date of either the day the notice of commencement is recorded, or, if the notice of commencement has expired, the date the lien was recorded. If you foreclose on that property and you are successful, you have priority to get paid based on the date of your lien.
However, it’s all about the amount of equity on the property. If you have a $100,000 lien, for example, but the property, which is appraised at $175,000 and is subject to a first mortgage of $200,000, you have a property with no equity, and your lien is not worth anything.
What about bond claims?
These are rights you may have against the surety. If you prevail on a bond claim, you will have a money judgment against that surety. And if you do, you should wait 60 days. Because after 60 days, if the judgment hasn’t been unsatisfied, the surety will be reported to the state insurance commissioner and potentially prevented from selling any more policies in the state. One judgment is worth very little compared to not being able to write more policies. As a result, this strategy is often successful in seeking payment from a surety.
How do I collect on a judgment?
We find many of our clients are familiar with how to obtain a judgment, but are far less comfortable with and knowledgeable about how to collect on a judgment. This comes down to being experienced, creative and scrappy in pursuing debtors. Here’s what you need to know.
Step1: Be First
The expression “first in time, first in right” means that first judgments take priority. Your priority is the day you record a certified copy of your judgment in the county governing the debtor’s property. If any other liens or prior judgments are on that property, then they are in line for payment before you.
The rights to a debtor’s personal property are secured by docketing a copy of the judgment with the Secretary of State in the appropriate state. You will find a public database online for judgments in each state.
Step 2: Garnishment
The most inexpensive, effective and quick collection tool is being able to locate the debtor’s bank accounts. This process is called garnishment, the ability to take money or property a debtor owes you from a third party holding that money or property. In this case, the third party is a bank. If you have a judgment and can identify a bank account in the debtor’s name, you can submit a writ of garnishment through the court to the bank. Money in the account sufficient to satisfy your judgment will be set aside, subject to exemptions. The most challenging aspect of a garnishment is finding the bank account. If you were lucky enough to have had the debtor pay you by check, and you kept a copy of that check, you will know where your debtor does his/her banking. There are also companies that find bank accounts for a fee. Garnishment is always our first attempt at seeking payment for a client.
Step 3: Enforce
The next way to get paid would be finding personal property, typically cars and boats. If you can identify any vehicles owned by the debtor – whether that’s a company or an individual – those items are subject to your judgment. Search the Uniform Commercial Code (UCC) database to see if there are any prior judgments on the item. Also determine whether there is any equity. Picking up a car or a boat is an expensive endeavor. You will need to get the sheriff involved. You will have to pay a company to tow and move the item, which will go to a bonded warehouse until it is brought to public auction. That intended sale also has to be published.
In pursuing payment you can also look to the debtor’s equipment and inventory. It’s wise to check prior UCC claims to make sure you don’t pick something up that belongs to someone else with higher priority. Again, keep equity in mind. And most importantly, use a collection mindset. Picking up printing equipment might mean you need a costly forklift and it may not seem worthwhile. But, if you go to an office to clean out desks, chairs or computers, sometimes that’s disruptive enough that your debtor will pay up to avoid that business interruption.
Another though more expensive procedure is setting and taking the debtor’s deposition in aid of execution. This involves getting the debtor in during which you can ask about assets, what he makes, what he owes, where he banks, etc. If a debtor isn’t paying you, there’s a chance he will be less than forthcoming about his assets. This approach is not always successful, but it’s an option.
Don’t throw good money at bad money
Following all these steps is costly, typically several thousand dollars. If a vehicle is only worth $3,000, that might not net you enough to make it worthwhile. That said, a vehicle is often crucial to your debtor’s ability to make money. Sometimes even the action of going to attach the car helps him “find” the money owed to you and you can see the debtor pay up.
Here are few more approaches to getting paid that have been time-tested by our firm:
- Be the squeaky wheel. If you are dealing with judgment debtor who owes you money, be the person who is uber-persistent. The debtor will have you higher on his to-do list, even if that means starting a payment plan.
- Accounts receivable. Does anyone owe the debtor money? You can ask him, but you might not get an honest answer. Try to figure out ways to learn independently who may owe your debtor money that can become your money.
- If judgment debtor has lien rights on a job, that will be public record. Your judgment can access that lien.
- Notices of commencement. Figure out what jobs your debtor is working on, and you have an opportunity to garnish those wages.
- Open permits. If the debtor is doing work that requires a permit, you will be able to see who’s hired him. You can garnish that work in progress by sending notices to each of the general contractors.
- Proceeding supplementary. This means you can sometimes pursue third parties, and the assets of those parties, who are not the named judgment debtors. For example, maybe ABC Plumbing owes you money, and the business closed and opened XYZ Plumbing – to avoid the judgment. Do they have the same phone number? Same office? Same employees? The same board of directors? Show relationship between the debtor and some other identity, and you may be able to pursue that other business to satisfy the judgment.
You have come far enough in the process and obtained a judgment. Don’t stop now. Persistence paired with some detective work can pay off and get you paid for your work.
No signed contract – can I still get paid
A contractor’s final affidavit is a document advising the owner of a property that the contractor is asking for final payment. The document lists any unpaid lienors. If there’s nobody that has lien rights and unpaid, there’s a section in the form to indicate that.
Know that this form titled contractor’s final affidavit and found in Florida’s lien law statute only needs to be sent by those that have a direct contract, also known as privity, with the owner. This means that you do not need to send a contractor’s final affidavit if you are a subcontractor because your contract is with the general contractor and not the owner. It is, however, important to note that if you’re a plumber, for example, and you have a direct contract with the owner, you are considered a contractor under the lien law. And as such, you would need to send a contractor’s final affidavit because you have a direct contract with the owner. Whether or not you are required to send a contractor’s final affidavit is less about the scope of work that you provide, but more about where you sit contractually with respect to the owner.
The contractor’s final affidavit while sworn under oath is different from a sworn statement that is sometimes requested by an owner or a contractor. While both documents are similar, they are not the same document.
What must a contractor’s final affidavit contain?
A contractor’s final affidavit must contain the name of the owner and the contractor. It also needs to have a statement saying that the contractor has completed the work, and it should list the amount that is currently due to the contractor. The contractor’s final affidavit is typically accompanied with the lien, but you can also send the contractor’s final affidavit before a lien is recorded.
This document also needs to include a statement that all the lienors have been paid, and it must list the name and the amount of any unpaid lienors. Finally, this document must be drafted and signed under oath before a notary. Here is a sample of the document.
CONTRACTOR’S FINAL PAYMENT AFFIDAVIT
State of Florida, County of _____
Before me, the undersigned authority, personally appeared (name of affiant), who, after being first duly sworn, deposes and says of his or her personal knowledge the following:
He or she is the (title of affiant), of (name of contractor’s business), which does business in the State of Florida, hereinafter referred to as the “Contractor.” Contractor, pursuant to a contract with (name of owner) , hereinafter referred to as the “Owner,” has furnished or caused to be furnished labor, materials, and services for the construction of certain improvements to real property as more particularly set forth in said contract. This affidavit is executed by the Contractor in accordance with section 713.06 of the Florida Statutes for the purposes of obtaining final payment from the Owner in the amount of $_____. All work to be performed under the contract has been fully completed, and all lienors under the direct contract have been paid in full, except the following listed lienors: NAME OF LIENOR____________________AMOUNT DUE
Signed, sealed, and delivered this _____ day of _____, _____,
By (name of affiant)
(title of affiant)
(name of contractor’s business)
Sworn to and subscribed before me this _____ day of _____ by (name of affiant), who is personally known to me or produced _____ as identification, and did take an oath.
(name of notary public)
My Commission Expires:
(date of expiration of commission)
When do you need to send one?
As stated earlier, you only need to send a contractor’s final payment affidavit if you have a direct contract with the owner and when you are requesting final payment. It’s not required from material suppliers that only provide materials and no labor even if they have a direct contract with the owner. For example, a roofing supply house providing roofing tiles for a project and directly contracted to the owner is not required to send a contractor’s final affidavit when submitting a request for final payment. But it is highly recommended that you do. It doesn’t prevent your lien rights from maturing.
If you are a contractor and you are obligated to send a contractor’s final affidavit to the owner, you need to send one no later than five days before you foreclose on your lien. If you don’t send it within that time period, then you will lose your lien rights.
The only other time you need to send the contractor’s final affidavit is if the notice of commencement on the project is terminated. That typically happens during the course of a project when financing comes midway through the job.
Why is it important for subcontractors and material suppliers?
As stated earlier, a subcontractor, a plumber for example, is required to send a contractor’s final affidavit if they are in direct contract with an owner. You need to make sure that you’re aware of this requirement so that you don’t lose your lien rights.
It is important to know about this document even when you are not in direct privity with the owner. This is because if an owner pays a general contractor without getting a contractor’s final affidavit, then that payment is considered “improper” under the law. How is this important to you as a subcontractor? “Improper” payments may require the owner to pay twice if the contractor or subcontractor did not pay the subcontractors, sub-subcontractors or material suppliers. Here is an example. If the owner makes a final payment to the contractor and the owner doesn’t receive a contractor’s final affidavit in exchange for that final payment, then if the contractor doesn’t pay the subs, the subcontractors still retain their lien rights. So, if you’re a subcontractor or a sub-subcontractor or a material supplier and you file a lien, but the owner is insisting that he does not owe you because he has already paid the contractor, one of the things you can do is to ask the owner for a copy of the contractor’s final affidavit he received when he issued the final payment. If he can’t produce this, then you have a right to record the lien.
Subcontractor’s right to get paid
Taking deliberate steps and paying close attention to contract dates and language will increase the likelihood of getting paid for your work. Thinking about and planning for these steps before you sign a contract will likely benefit your bottom line.
Understand Your Contract
Usually, it’s one sticky contract provision that prevents timely payment – or any payment – to a subcontractor: the pay-when-paid clause. In nearly every contract, pay-when-paid is valid and enforceable.
This contractual provision attempts to shift the risk of owner nonpayment from the contractor to the subcontractor. To deal with it, you must understand it. Put simply, with this clause, a contractor who hasn’t been paid by the owner does not have to pay a subcontractor. This is a legal defense to non-payment. So, if you see this, how do you deal with it?
First, you could try to strike or modify the provision. That’s unlikely to happen as this is a contractor safety net which most are usually unwilling to lose.
Next, you can add a “stop-work” provision to your contract. This doesn’t eliminate the risk, but it does lessen it. Without a stop-work clause, you as a subcontractor must keep working and paying suppliers, laborers, and overhead – even if you are not getting paid. You can proceed with the dispute resolution procedures that are in your contract, but the financial bleed won’t stop while you try to negotiate, arbitrate, or litigate.
That happens with this sort of language:
When that happens, consider amending your contract with this one sentence:
A contractor may insist on 45 or 90 days, but the important thing is having the ability to stop work at some point. Again, this doesn’t guarantee payment, but it’s critical in stopping the financial hemorrhaging.
Secure and Assert a Lien Claim
An owner can’t stand behind the pay-when-paid defense when you have asserted a lien claim. If you aren’t paid, and you have a lien, on the property, you can sell or foreclose on the property to get paid. The right to lien doesn’t guarantee you will get paid, but it mandates that if there’s equity in the property, you are entitled to it, in line with other lienors.
To have lien rights, the contract price between the owner and the contractor must be greater than $2,500. You must also adhere to these specific lien statute requirements to “perfect” your lien rights.
- Serve a Notice to Owner to all interested parties no later than 45 days from the first labor or furnishing of materials per the contract.
- Record a Claim of Lien no later than 90 days from the last day of work or material delivery.
- Serve a copy of the Claim of Lien to all interested parties within 15 days of recording the lien.
- File a lawsuit to enforce the lien, called foreclosing, within one year from the date of recording the Claim of Lien.
The “days” mentioned are calendar days including each weekend day and legal holiday. Start counting on the day after the day you deliver the materials. If the last day falls on a weekend or legal holiday, the deadline will roll to the next non-holiday weekday.
Be mindful to count by days and not months, as not every month has 30 days, and counting that way can lead to inaccuracies and missed deadlines. Also be aware that warranty and punch-list work is not considered last work, while approved change order work is.
A Claim of Lien can be amended at any time during the original 90-day period allowed for its recording, so long as that alteration isn’t detrimental to anyone who relied upon the original Claim of Lien.
Secure and Assert a Payment Bond Claim
A bond is another instrument that secures the lienor’s right to payment. Instead of a claim on the property, the lienor has a claim against a surety/payment bond. The surety can’t use the pay-when-paid clause to keep from paying you. Almost every public job, and some private jobs, are bonded by the contractor. (Note: In Florida, a conditional payment bond requires that you pursue both lien rights and bond rights.) Like the lien process, there are specific steps to follow to pursue payment:
- Determine whether a project is bonded by looking at the Notice of Commencement, or the public records where the project is located. A noticing service also provides this information.
- Serve a Notice to Contractor either before beginning or within 45 days after beginning to furnish labor, materials, or supplies. This lets the contractor know you will look to the bond for protection. If you are in direct contract with a bonded contractor, this notice isn’t necessary, but it’s still recommended. It’s a best practice and good security to notice any job over a certain dollar amount.
- Note any failure to record a Notice of Commencement, or reference the bond. A lienor has 45 days from the date of being notified of the bond’s existence within which to serve the notice. If the recordings are not done per the law, you may have more time. A construction attorney can explain this and other exceptions to the rules.
- Serve a Notice of Nonpayment to the contractor and surety no later than 90 days after providing final labor, services, or materials.
- File a lawsuit to foreclose no later than one year from the last day of work or delivery of materials to the project.
Though you technically have a year, it’s never advisable to wait that long to bring suit. It’s recommended to file suit from 60 to 90 days of serving a Notice of Nonpayment. If you haven’t been paid by then, it’s unlikely that waiting longer will get you paid.
Exchange a Conditional Release for a Check – Carefully
Contractors can lose rights because they release more than they intend to, especially when accepting partial payment. Use the statutory form found in Chapter 713. However, if you signed a contract that specified a certain type of release, you must use that one. Negotiate this before signing a contract.
- Understand exactly what you are releasing with your signature. Make sure the amount of time and money being released match up. For example, if you sign a release accepting $30K of the $50K you are owed, and you are releasing rights to be paid the rest of the month, you will be out the other $20K. Sign a release to receive that $30K, but make sure the date reflects the week or two that money accounts for, not the whole month.
- Don’t judge a form by its title. If a page announces, “Partial Release,” don’t assume you have more rights still to come. The stated dates are what matter.
- Account for retainage, pending change orders, and other claims. If you don’t, you may be unwittingly giving up payment that should be yours.
It’s important to protect yourself against nonpayment as much as possible before signing any contract. But just as critical is knowing the options, remedies, pitfalls, and deadlines involved in the path to getting paid.
Record the lien to get paid
The lien is a powerful tool at your disposal to increase your ability to get paid.
As an encumbrance, or a hold on real property, it creates a cloud over the legal title preventing the sale or refinance of the property. When you place a lien on a piece of property that you have improved through your work, ownership can’t generally be transferred while you are owed payment. A lien usually constitutes a technical default on a mortgage, and that gets the attention of the mortgage company. A lien may also be considered a default on a prime construction contract.
A lien creates pressure to get you paid, but it’s important to recognize that filing a lien is just a starting point. You have to do a number of other things yourself.
To place a lien, serve a Notice to Owner no later than 45 calendar days from day your first work on project. Doing this much earlier is best.
Next, record the Claim of Lien no later than 90 days from your last day of work on the project. This must be signed, notarized, and physically brought to the clerk’s office – all of which can take time. Best practice is to get this process underway after no longer than 60 days have elapsed. Within one year of recording the Claim of Lien, you should file a lawsuit to foreclose on the property.
What actually happens after you record a lien?
Simply put: nothing. You have to make something happen. Your lien alone might cause the owner to want to pay you – maybe. However, the lien is merely a cloud over the property at this point, not a legal order to pay.
While the lien starts the process to getting paid, and it puts you closer to the front of the line, you must enforce your lien rights through a civil court action called “foreclosure.” Unless time is legally shortened, you must file a suit to foreclose no later than one year from the recording date of the lien. This is similar to any other court action in cost and time. The property owner could claim you did not deliver materials or work on time, and that’s why you haven’t been paid. You must deal with those issues in court.
So how do I get paid?
Those who get paid do not wait on or miss deadlines. You can actually record your lien right after you start work. The dates given are outside limits, and you don’t want to wait, especially in this economic climate.
Then, for 60 days after recording the lien, hassle your customer and owner for payment by phone, mail, and email. Visit your client and sit in their office, waiting to get paid. Your effort is important because it could possibly prompt payment and avoid court action.
After those 60 days, construction lawyer. Don’t wait unless you have a good business reason to do so.
My lien was “bonded off.” What does that mean?
It means you should celebrate! Your lien was on the property, subject to the foreclosure process and the hope that there’s equity in the property after prior mortgages are taken out. But now, bonded off, it has been attached to either a surety bond or cash held by the clerk. The bond amount is 150% of the Claim of Lien. You should be covered but prepare for a fight. They will assert defenses before paying you.
There’s a “Notice of Contest of Lien.” Now what?
This means you should file your lawsuit to foreclose immediately. File your action to foreclose the lien within 60 days of the Notice of Contest being received. If you don’t file by the 60th day, your lien will automatically be extinguished.
I received a 20-day summons. Is this a problem?
This also shortens your timeline and means you should file a lawsuit immediately. A process server delivers a 20-day summons. If your response or counterclaim for foreclosure is not filed within 20 days, the lien is extinguished.
There are no caveats to these rules; they are firm deadlines. Importantly, remember that filings alone will not result in payment. That can only come after meeting a series of statutory deadlines, pushing for payment, and then filing a court action.
Prevailing party attorney’s fees
The prevailing party for the purpose of a contractual attorney’s fee provision is the party that prevails on the significant issues in the litigation. The test for determining if a party is “prevailing” is whether it was successful on “any significant issue in litigation which achieves some of the benefit the parties sought in bringing suit”.
The trial judge determines who is the prevailing party, based on a determination from the record as to which party has, in fact, prevailed on the significant issues tried before the court. (“…the fairest test for a determination of the prevailing party is to allow the trial judge to determine from the record which party in fact prevailed on the significant issues tried before the court”).
Focus on Results
In making its determination as to which party prevailed, the trial court should focus on the “result obtained”. As such it is result, not procedure, which governs the determination of who is a prevailing party.
As such, just because a party may have obtained some economic benefit as a result of the litigation does not necessarily mean that it is a prevailing party.
“Simply because a party has obtained some economic benefit as a result of litigation, does not necessarily mean that party has succeeded on the major issue in the case”.
Additionally, because a trial court may properly find that neither party has prevailed in a contract action, under compelling circumstances it is possible that there will be no attorney fee award in litigation involving a contractual provision for prevailing party’s attorney’s fees. For instance, there is no prevailing party when a settlement occurs. However, where there is a functional equivalent of a judgment, the fact that a final judgment was not entered is not controlling in the determination of a prevailing party.
Finally, there appears to be a slight variance in the cases to the extent they discuss “significant issues” versus the “major issue”. To the extent that “significant” and “major” may be ascribed different meanings, and because one phrase is plural while the other is singular, this variance in language may eventually be of crucial importance in the determination of whether a party is the prevailing party for the purpose of an attorney’s fee statute.
Who is Prevailing Party?
Construction contracts and construction-related statutes generally provide the prevailing party with recovery of its incurred attorneys’ fees. However, the prevailing party, normally defined as the party who prevailed on the significant issues tried before the court, is not always easily determined, especially in a suit involving several claims or even counter-claims.
When a mechanic’s lien claimant obtains any amount of judgment, the claimant is the prevailing party for the purposes of the attorneys’ fees provision within Florida Statutes § 713.29 but a successful defendant may be able to obtain attorneys’ fees for successfully defending a mechanic’s lien claim.
It Could be the Contractor
A contractor may be the prevailing party if it does not recover pursuant to the mechanic’s lien, but nevertheless obtains judgment for damages pursuant to a contract or equity. Coined a “net judgment rule”, it allows contractors a recovery of attorneys’ fees pursuant to contractual or equitable principles but only if the contractor’s judgment is a net recovery. Moreover, a party may be the prevailing party entitled to mechanic’s lien statute attorneys’ fees, where the case is dismissed for lack of prosecution.
Further explaining the prevailing party attorneys’ fees, a Florida court recently awarded a contractor attorneys’ fees subsequent to his recovery of damages under his mechanic’s lien claim. Although the owner prevailed on his breach of contract claim, the contractor recovered a net judgment after all of the set-offs for construction defects. In conclusion, when a claimant in a mechanic’s lien action recovers a judgment in any amount, the trial court will generally find the claimant the prevailing party and award him attorneys’ fees pursuant to statute.
The right to recover attorney’s fees
A party’s right to recover attorney’s fees incurred over the course of litigation hinges directly on whether one is deemed by the court to be the “prevailing party” at the conclusion of the case. Previously, the focus of the courts in deciding who was the prevailing party was based solely on the claim of the lien holder and whether he was ultimately awarded damages pursuant to his lien claim.
In the event that a lienor collected even a single dollar of his lien claim, he was treated as the winner – the prevailing party under Florida Statute 713.29, and was entitled to recover his reasonable attorney’s fees. This narrow interpretation became a significantly disputed issue and has been reviewed and broadened by the Florida Supreme Court.
Unfortunately for contractors, no longer is the result of the lien claim the only basis for reaching the determination of who won. In one case, the Florida Supreme Court decided that the main issue before it was not the contractor’s lien claim, but the amount of setoff that the owners had claimed in opposition to the lien. While the contractor in that case was awarded some money under his lien claim, the owners obtained almost the entire amount of setoff that they had sought and for that reason the Court determined that the owners, not the contractor, were the prevailing party and the ones entitled to recover attorney’s fees.
Courts are now applying what is commonly referred to as the “significant issues” test. This requires weighing all claims and the ruling made on each to determine which party, if any, truly prevailed in the litigation.
All contractors need to be aware of this development, especially since most lien claims are generally met with a setoff defense. This means that even if a contractor wins a portion of his lien amount, he may be the ultimate loser, and not only see his claims for attorney’s fees defeated but worse, also be on the hook for the other side’s legal fees and costs.