1. Collection laws and the delicate dance of demanding
payment for services rendered
In the last generation, the law in the jurisdictions in which I
practice (Illinois and Wisconsin) generally has given contractors
increased rights to collect monies due to it: contractor-favorable
legislation including stricter prompt payment statutes and more
generous lien laws, as well as courts “interpreting” these laws more
favorably toward contractors.
Despite these changes, and maybe sometimes because of them,
a constant I have seen has been that many contractors either don’t
bother to learn the tools that are available to them or, when they
do learn, defer using them until it’s too late. They express fear that
the customer will shut the contractor out of future business if the
contractor asserts a construction/mechanic’s lien against the subject
property or gives notice to the customer’s bonding company.
When this happens, the contractor’s legal rights become useless.
Sometimes a customer might blacklist a contractor who asserts
its right to be paid, although I suspect not nearly as often as the
contractor fears. Plus, as my mentor used to tell me, I could get
a lot of clients (that I didn’t want) if I wanted to give my services
away for free. In that case, it would be better to use my trade for
a charity or other good cause instead of an enterprise that seeks
to make a profit by refusing to pay as agreed. My mentor’s advice
made business sense to me, and it applies to construction contractors,
as well. If a customer isn’t paying you, how much more business
do you really want from that customer?
Here is how I often advise clients about getting paid:
A. Learn enough about the applicable law in the place you are
working to know when to contact your legal counsel. You don’t
need to study enough to become a lawyer; you just need to
know the basics.
B. Keep up to date on the status of your receivables for each project
vis-à-vis the time period for acting in accordance with the
rules you learned above at least on a weekly basis. Flag any
project with ample time left to make calls and then to act if
necessary.
C. When a project gets flagged, contact your customer and find
out why you haven’t been paid. It might be (and often is)
because the customer hasn’t been paid. If that’s the case, the
customer should not resent (a) your advising it that you have
X number of days to act; (b) if you are not paid within that
time, your lawyer says that you have to act or forever hold
your peace (blaming your lawyer is almost always a good idea,
right?); and (c) you intend to follow your lawyer’s advice. If the
customer hasn’t been paid, it should agree and perhaps even
move forward with steps to perfect its own claim. If the customer
pushes back, it might be a sign that it has been paid and
is withholding from you the share of the money it received for
your work. It’s okay to tick off that kind of customer; you really
don’t need any more of those.
D. Take the steps necessary to exercise your rights (i.e., perfect
your lien) on a timely basis with the conviction that you did
the right thing for your business. If the customer balks at hiring
you for the next job, it likely is because you caught them
B.S.-ing you. See the last sentence of the preceding paragraph
on how to react to that.
2. The rise, and then the erosion of enforceability, of
“pay-if-paid” clauses
In the time I have been practicing, I have seen upstream parties
(usually prime contractors) increasingly condition payments to its
subcontractors on the upstream party’s receipt of payment from its
customer, usually the owner. Whether you see this as a legitimate
and proper allocation of risk, or simply s—t floating downstream,
likely depends on where in the river you are located. But it is hard
to deny the fact that many subcontract agreements provide as
such, and it takes some intestinal fortitude to say “no” to this unless
you are in a trade that is very hard to find.
The increased use of such clauses has prompted reaction in various
jurisdictions. Whether by statute or by court decision, several
have limited the enforceability of (i.e., IL, WI) or effectively have
outlawed (i.e., CA, NC, NY) conditional payment clauses.
It has been my experience that getting upstream parties to
delete such clauses in their entirety in their proposed subcontracts
is difficult. The risk that a prime contractor faces, potentially having
to pay all of its subcontractors when it has not been paid the
money earmarked for those subcontractors – in essence, involuntarily
becoming the owner’s bank – is a risk that it (understandably,
from its perspective) would like to allocate to others as much as
possible. Subcontractors, equally understandably, don’t want the
risk of owner non-payment imposed on them when they have no
direct agreement with the owner and, therefore, have to rely on the
upstream party’s pursuit of their money.
Amending the provision to a “pay when paid” clause, which
generally buys the upstream party a reasonable amount of time
but does not condition the obligation on the owner’s payment,
might be an alternative both can live with. There are other options.
Allowing your payment to be conditioned on an act that you can’t
compel is leaving yourself badly exposed.
3. Little change: The expense of resolving delay,
acceleration and impact claims
You have committed your resources to Project X for the roughly
90-day period between June 1 and September 1. Your start date
is delayed for one of dozens (or hundreds) of reasons. Halfway
done, another trade falls behind or does something else that keeps
you from proceeding. You’re effectively unable to work for several
CONSTRUCTION LAW
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