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 Prompt Payment Act
In addition to the terms of the contract, if the project was governed by the laws of New York, a construction contractor’s ability to suspend work may be governed by the Prompt Payment Act (“PPA”). The PPA governs suspension of work on many private construction projects where the construction contract has an aggregate price of $150,000 or more. The PPA applies to the construction of commercial developments and some large-scale residential developments. However, the PPA does not apply to most small residential contracts or to government (public) contracts.1
The PPA states that owners must pay prime contractors within 30 days of approval of an invoice – with the exception of when the owner has given proper notice of rejection for defective construction work, disputed work, etc. When prime contractors send their invoices to the owner, the owner has 12 business days to disapprove of all or part of the invoice. If 12 business days have passed and the owner has not sent to the contractor notice of its disapproval, in writing, then the owner has been deemed to have approved the invoice in full. Once the owner has approved an invoice, either explicitly or implicitly, the owner must tender payment to the prime contractor within 30 days of the approval of the invoice. 2
It must be noted that the rules under the PPA are slightly different for timely payment to subcontractors. In New York, a prime contractor must tender payment to its subcontractors within 7 days of having received payment from the owner for their work. Likewise, subcontractors must tender payment to their sub-subcontractors within 7 days of having received payment for their work from the prime contractor, etc.
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 rate of 1 percent per month. The parties can contract for a higher interest rate on delinquent payments.
Suspension of Work by Prime Contractors
The PPA grants prime contractors a statutory right to suspend performance in the event of non-payment by the owner, so long as the contractor follows a certain procedure.
If an owner fails to make a timely payment for an invoice within the statutory period of 30 days, the prime contractor must provide the owner with written notice and an opportunity to cure, which must inform the owner that the prime contractor has not received payment for an undisputed invoice. The written notice must state the prime contractor’s intent to suspend performance for non-payment, and it must be provided to the owner at least 10 days before the intended suspension of work.
If the owner has still not cured the deficiency within 10 days of the notice, then the prime contractor may suspend performance. If the prime contractor suspends performance in compliance with the PPA, “the contractor shall not be deemed in breach of the construction contract.”
Suspension of Work by Subcontractors
The PPA also grants subcontractors a statutory right to suspend performance in the event of non-payment. The rules for suspension of work by a subcontractor are slightly different because there are multiple upstream parties who have a right to receive notice. Accordingly, if a subcontractor intends to stop work for failure to receive timely payments, the subcontractor must provide notice to both the owner and to the general contractor. The written notice must inform the owner and the GC that the subcontractor has not received payment for an undisputed invoice. The written notice must also state the subcontractor’s intent to suspend performance for non-payment.
If either the owner and/or the general contractor have still not cured the delinquent payments to the subcontractor within 10 calendar days following written notice, the subcontractor may suspend performance. If the subcontractor stops work according to the procedures outlined by the statute, then the subcontractor “shall not be deemed in breach of the construction contract for suspending performance.”
If the Prompt Payment Act applies to a construction job and the terms of the contract conflict with the statute, the Prompt Payment Act may override the terms of the contract. Parties can no longer contract around the requirements that an owner must pay within 30 days of approval of an invoice, and that a general contractor must tender payment to a subcontractor within 7 days of having received payment for work.
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.
1General Municipal Law 106(b), establishes similar requirements for prompt payment from public owners to prime contractors within 30 days of receipt of invoice, and for prompt payment from general contractors to subcontractors within 7 days of receipt of payment – but does not provide contractors with a statutory right to suspend performance.
2Unless noted otherwise, “days” refers to “calendar days.”