A recurring question for construction contractors is whether they can stop work if they have not been paid on time. Contractors need to be very careful about suspending performance for non-payment. If contractors strictly follow the rules, and the terms of the contract, they can protect their rights. However, if contractors stop work prematurely without providing proper notice, or otherwise fail to comply with any applicable laws, they can expose themselves to liability for breach of contract.
When determining whether you have the right to stop work, the first place to look should be the terms of the contract. In many instances, the contract may be the only applicable law.
General Contractor Agreements based on form AIA A201 should include Paragraph 9.7, which provides the following:
[I]f the Owner does not pay the Contractor within seven days after the date established in the Contract Documents … then the Contractor may, upon seven days’ written notice to the Owner and Architect, stop the work until payment of the amount owing has been received.
Subcontractor Agreements based on form AIA A401 should also include Paragraph 4.7, which states as follows:
If the Contractor does not pay the Subcontractor through no fault of the Subcontractor, within seven days of the time payment should be made as provided in this Agreement, the Subcontractor may … upon seven days written notice to the Contractor, stop the Work of this Subcontract until payment of the amount owing has been received.
Even if the construction contract is based on an AIA model, it is quite common for parties to modify the terms of Paragraphs 9.7 and 4.7. For example, the notice requirements might be adjusted; the drafting party might tack on additional requirements, or they may remove the provisions altogether. Every contract needs to be analyzed on a case-by-case basis.
The New Jersey Prompt Payment Act
In addition to the terms of the contract, if the project was governed by the laws of New Jersey (either because the project is located in New Jersey, or because there is an enforceable choice of law provision in the contract), a construction contractor’s ability to suspend work may be governed by the Prompt Payment Act. New Jersey’s Prompt Payment Act (“PPA”) applies to most construction contracts in New Jersey, private or public, between owners, prime contractors, subcontractors, and second-tiered sub-subcontractors. The PPA does not apply to certain public construction projects, namely transportation projects, and it also may not apply to lower-tiered sub-subcontractors.
According to the PPA, owners must pay prime contractors within 30 days from the billing date. Once the prime contractor has sent an invoice to the owner, the owner has 20 days to disapprove the invoice (or any part). In order to reject any charge reflected on an invoice, the owner must send the prime contractor a written statement specifying: (1) the amount withheld; and (2) the reason why the owner is withholding payment. If 20 days have passed since the prime contractor has sent the invoice to the owner and the owner has not lodged a dispute, then the invoice has been deemed implicitly “approved and certified.” If the owner has approved of a prime contractor’s invoice, explicitly or implicitly, the owner must tender the payment to the prime contractor within 30 days from the owner’s receipt of the invoice.
The rules for prompt payment of work by a subcontractor are slightly different. If a subcontractor has performed work according to a subcontract and the work has been accepted by the owner or the prime contractor—and there has been no agreement in writing to the contrary—the prime contractor must tender payment to its subcontractor within 10 days after the receipt of payment from the owner. The same rules apply to payments between a subcontractor and a sub-subcontractor. Though, unlike owners, prime contractors and subcontractors are not required to provide a specific reason for withholding payment to their subcontractors and sub-subcontractors.
If any payment is delayed according to the requirements under the PPA, the owner must pay the contractor interest on the delayed payment at the prime rate plus 1 percent. The parties can contract for a higher interest rate on delinquent payments.
Suspension of Work by Prime Contractors
If an owner fails to make a timely payment within the statutory 30-day period, has not made a written statement specifying the reasons for withholding, and has not “engaged in a good faith effort to resolve the reason for the withholding” with the contractor, the prime contractor may be able to stop work.
In order to stop work, the prime contractor must provide the owner with written notice and an opportunity to cure. Specifically, the prime contractor must provide written notice to the owner at least 7 days before the prime contractor’s intended suspension of work. If 7 days have passed and the owner has still not cured the delinquent payment, then the contractor may suspend performance without penalty for breach of contract.
Suspension of Work by Subcontractors
If a prime contractor receives payment from the owner but fails to make a timely payment to a subcontractor within the statutory 10-day period after receiving payment, a subcontractor may suspend performance—but only after providing written notice and an opportunity to cure to the party which has failed to make the required payment (potentially the owner, prime contractor, and/or an upstream subcontractor). The subcontractor must provide written notice to such upstream parties at least 7 days before its intended suspension of work. If the subcontractor has provided proper written notice to the non-paying party, and if after 7 days of providing notice the breaching party still has not made the required payment, the subcontractor may suspend performance without penalty for breach of contract.
Keep in mind that the New Jersey Prompt Payment Act may apply to your situation, and that sometimes the statute may supersede a written agreement. Sometimes it may be unclear whether the statute applies at all. In such a case, you might have to fall back on the terms of the private contract.
It is crucial that contractors fully understand their contracts. A well-written contract may protect your rights, while a poorly-written contract might be unenforceable—or worse. While many contracts will refer to the AIA language, parties can always agree in writing to different standards for prompt payment, and different procedures for the unpaid contractor to stop work. In that regard, always make sure to consult with an attorney before stopping work because of non-payment, or for any other reason. Even if you have a contractual right to suspend, it is absolutely imperative to give proper notice and take proper steps before doing so. If you do it the right way, you can be in the clear. If you do it the wrong way, you can be found to be in breach of contract and potentially liable for damages.