By: Alexander A. Miuccio Published: June 2011

The Pitfalls Of Stopping The Work For Nonpayment

The majority of cases regarding abandonment of work occur after a dispute over payment. A contractor or subcontractor is justified in stopping the work for nonpayment if there is a substantial delay in making a substantial progress payment. In such instance, the nonpayment constitutes a material breach of contract. But contractors should proceed with caution prior to taking drastic action such as stopping the work.

Contractors who consider abandoning a job should make sure that they follow the requisite provisions of the contract prior to stopping work.

In the recent case of Zip Sys., Inc. v. Lettire Constr. Corp., the court ruled that a subcontractor wrongfully abandoned the work for nonpayment because he failed to comply with the notice of termination provisions of the subcontract.

Background 

Zip Systems, Inc., as subcontractor, entered into a contract with Lettire Construction Corp. to install elevators at the "Honeywell II" project, located in the Bronx. The subcontract called for periodic payment requisitions as the work progressed. The first payment application was timely paid. The second payment application, made on February 5, 2008, was not paid until June 24, 2008. The third payment application was made in September 2008 for $193,500, was partially paid on October 31, 2008 in the amount of $85,000, and was never paid in full. The subcontractor stopped work on December 1, 2008 and sent a letter on the same day stating that it would not return until it received payment. The subcontractor then sued the general contractor for the balance due, and moved for summary judgment.

In opposition, the general contractor argued that the subcontractor breached the contract by failing to follow the contractual procedure for stopping work. Under the contract, the subcontractor was required to send a written notice not earlier than seven days after payment became due, advising that if payment was not received within seven days of the written notice, the subcontractor would stop work. Alternatively, the contract permitted the subcontractor to stop work sixty days after nonpayment. Under either provision, the contractor argued that the subcontractor improperly abandoned the work since the proper notice was not sent and payment was not sixty days past due.

In addition to opposing the subcontractor’s summary judgment motion, the general contractor made its own motion for summary judgment, arguing that it incurred $31,000 in extra costs to complete the subcontractor’s work.

Decision

The court ruled in favor of the general contractor. The court focused on the language of the parties' contract, which set forth the terms under which the subcontractor was permitted to stop its work. The court ruled that the subcontractor wrongfully abandoned the project and breached the subcontract because it failed to comply with the contract terms prior to stopping the work for nonpayment. Since the subcontractor breached the agreement, the general contractor was entitled to the fair market value of the excess costs incurred in completing the subcontractor's work.

Comment 

There are a number of factors that a contractor should weigh in deciding whether to stop its work. How much work is left? How much is owed? How long past due is the debt? What are the contract provisions for stopping the work? In this case, an otherwise valid debt due was waived on account of the subcontractor’s failure to comply with the work stoppage provisions of its contract. To make matters worse for the subcontractor, rather than recovering monies due to him, the subcontractor was held responsible for the general contractor’s excess completion costs.

The decision whether to "walk off the job" should never be taken lightly. Although it rarely occurs, there are times when abandonment is the best alternative despite the inherent risks. The decision, however, should only be made after consultation with legal counsel.

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