Can a Subcontractor Sue a Contractor If They Don’t Pay?
The construction industry is filled with payment disputes. The hope is that the property owner will pay the contractor, who will, in turn, pay the subcontractors. However, with this trickle-down payment method, there’s often a problem, leaving a subcontractor wondering, “How long does a contractor have to pay a subcontractor?” What happens when the contractor is not paying the subcontractor? In addition to the above, a property owner may wonder, Am I liable if my contractor did not pay the subcontractor?
Depending on the type of construction project, the law sets forth various time requirements within which a contractor must pay a subcontractor. If a contractor is not paying a subcontractor, the subcontractor may have the right to sue, go to arbitration, or get a mechanic’s lien.
How Long Does a Contractor Have to Pay a Subcontractor?
Generally, the answer to the question “how long does a contractor have to pay a subcontractor” depends first on the contract between the two parties. Please note that this piece does not discuss arrangements involving governmental entities, as special rules apply to public projects.
Construction Contract
How long does a contractor have to pay a subcontractor? This depends on the payment provision in the contract between the parties. Construction contracts between subcontractors and contractors typically include a monthly billing cycle or a milestone payment agreement. A milestone payment means that the subcontractor gets paid portions when they meet certain milestones in a project. Then, if the subcontractor completes the work and the contractor does not pay by the time specified in the contract, the subcontractor can file a lawsuit against the contractor.
New York Prompt Payment Act
Certain construction contracts are not only subject to their own terms but also to New York’s Prompt Payment Act. In 2003, New York enacted the Prompt Payment Act (PPA), which addresses issues such as how long a contractor has to pay a subcontractor and payment issues between owners and contractors. Generally, the PPA covers most private construction projects costing $150,000 or more. The exceptions include projects involving:
- Government projects,
- One, two, or three-family residential dwellings,
- A residential development consisting of 100 or fewer one or two-family residences,
- A residential project of 4,500 square feet or less, or
- A residential project of fewer than 75 units receiving financing from the government.
All other private projects in New York fall within the PPA.
Under the PPA, the parties to a contract must establish a billing cycle. The default billing cycle is the end of each month. The subcontractor must submit timely regular invoices to the contractor describing the actual work performed. If the subcontractor completes the work and performs as agreed, this entitles them to payment.
The contractor must also disclose when it expects payments from the owner. According to this schedule, the contractor submits an invoice to the owner, who has 12 days to approve the invoice. Then, the owner must pay the contractor’s invoice within 30 days of approval. From there, a contractor must pay its subcontractor the proportionate amount paid by the owner for the subcontractor’s work within seven days of receipt of the funds from the owner. If the contractor is not paying the subcontractor as required, the subcontractor can also collect interest on the unpaid amount.
If the contractor is not paid by the owner and the contractor is not paying a subcontractor, the subcontractor has the right to pursue legal action against the contractor and the property owner. Plus, if the owner or contractor does not make payments according to the payment schedule, the subcontractor can stop working until they’re paid, so long as they provide 10 days notice.
Pay-When-Paid or Paid-If-Paid Provisions
Some private construction contracts include a pay-when-paid provision. A pay-when-paid provision is where the contractor tells the subcontractor they will pay the subcontractor when the owner pays them. Courts have invalidated these as against public policy if their purpose is to pass the risk of owner non-payment to the subcontractor. The subcontractor still has an independent right to pursue payment when they perform the work required under the contract.
Similarly, some contracts include a pay-if-paid provision. This provision typically states that the subcontractor will only get paid if the owner pays the contractor. These also have been invalidated, and a subcontractor can still pursue recourse regardless of whether the owner pays the contractor. In general, New York’s policy is that the contractor cannot pass all risk of non-payment to its subcontractors.
What Are the Subcontractor’s Remedies?
You may wonder about your potential remedies if you’re a subcontractor who hasn’t been paid. An owner may also wonder, Am I on the hook if my contractor did not pay the subcontractor? Below we discuss some of the subcontractor’s options if the contractor is not paying the subcontractor.
Lawsuit
The most common option when a contractor is not paying the subcontractor is for the subcontractor to file a lawsuit for breach of contract and quantum meruit. For the breach of contract claim, the subcontractor must prove that they fulfilled their part of the contract. Quantum meruit is a legal term meaning that the subcontractor should be paid a reasonable amount for the work because otherwise, the property owner and contractor were unjustly enriched by their work, this amount could be different from the amount which is set forth by a contract as it is set by the reasonable value of the improvement to the property and does not take any profit by the subcontractor or contractor into account.
You have six years to file a breach of contract claim in court. It’s important to consult with an attorney if you’re considering a lawsuit. An attorney can review your contract, explain the applicable law, and help you prepare and argue your case.
Arbitration
If the PPA covers the construction project, the parties can refer the case to an arbitration forum, most commonly, the American Arbitration Association for expedited arbitration. An arbitration is much like a court proceeding, however, an independent arbitrator, rather than a judge, will decide on the issues of the case, and the parties agree that the arbitrator’s decision is binding on the parties. An advantage of this forum is that the parties are able to choose the arbitrator to hear their case.
The primary drawback of arbitration is that there is no appeals process if the parties do not agree with the arbitrator’s decision. Plus, arbitration can be costly as it requires hiring an arbitrator who will have to be paid for their time. If the PPA covers your contract or your contract specifically requires arbitration if there’s a dispute, you should contact a lawyer immediately. You want to make sure that you put your best case forward in an arbitration, given that you only have one chance to get it right.
Mechanic’s Lien
A subcontractor also has the right to file a mechanic’s lien. A mechanic’s lien allows the subcontractor to file a lien on the property they worked on for the amount of money they’re owed. They must name both the property owner and the contractor on the lien. This lien attaches to the property, and the subcontractor can foreclose on the lien if they don’t get paid.
Owners might wonder, what is my liability if my contractor did not pay the subcontractor? An owner very well will be liable and should document proper payments made to their contractors. An owner should discuss their potential liability with an attorney, particularly if their contractor does not pay the subcontractor. Additionally, contractors can open themselves up to criminal and civil liability if they fail to release lien funds to their subcontractors, so, all parties involved in a mechanic’s lien should discuss all possible liabilities and avenues for possible recovery with an experienced attorney. Mechanic’s lien law can be complex, especially if you are on the receiving end of the lien, therefore, it is important that you discuss the issues with an attorney who knows the mechanic’s lien law of New York.
Call TonaLaw for Construction Contract Issues
Construction contracts can be complex, and enforcing them can seem overwhelming. Fortunately, the client-centered business litigation lawyers at TonaLaw can help. We have over 30 years of experience litigating cases on Long Island. If you need help, contact TonaLaw today.