What Happens If a Construction Client Fails to Pay?

What Happens If a Construction Client Fails to Pay?

2 Apr 2014

Can a Contractor Sue for Non Payment

Contractors and sub-contractors can seek compensation for work done. You may sue in court or leverage alternative dispute mechanisms like mediation or arbitration, depending on the situation. Clients also have rights, so they can raise a defense or counterclaim if they have a valid reason for refusing to pay. It’s crucial to hire an experienced construction attorney to assess the case and advise on the appropriate steps to take.

Do Contractors Have Legal Rights?

Contractors can sometimes find themselves in situations in which clients refuse to pay them. Contractors have certain legal rights to pursue payment for services rendered. These rights are typically governed by the following:

Statutes

Legislation is pivotal in determining the rights and obligations of contractors and sub-contractors. In Massachusetts, for example, there are statutes that address things like the requirements for a residential contracting agreement and lien rights. These laws must be strictly complied with to avoid adverse legal consequences.

Case Law

Legal principles derived from judicial decisions can also define the rights and liabilities of parties. Case law can elaborate on how a statute is to be interpreted or reaffirm the general principles of law. Although contractors and customers may not be familiar with relevant cases, attorneys are trained to apply them when advising clients, drafting or reviewing contracts, or providing legal representation.

Contract

A contract is a legally binding agreement between two or more parties. The agreement creates rights and obligations for the parties, which can be enforced through legal processes. A valid contract must possess essential elements, including an offer, acceptance, and consideration — a thing of value that the parties promise to exchange for the performance of the contract.

What Are the Benefits of Contracts for Contractors?

What Are the Benefits of Contracts for Contractors

Having clear, written contracts has many benefits, including the following:

  • Offers legal protection: The terms of a legally binding contract detail each party’s rights, responsibilities, and obligations. If a party breaches the terms of the agreement, the non-breaching party, who was relying on all parties to carry out their respective duties under the contract, may seek legal remedies based on that reliance. The contract may even spell out the particular legal remedies available to the non-breaching party if another party fails to perform under the contract.
  • Provides clarity: Some construction projects are complex, with many intricate details and instructions. A written contract provides clarity for the parties and serves as a reference point in case of disputes. 
  • Serves as proof of agreement: Written contracts often represent the full intentions of the parties. This makes the contract vital in proving claims, whether through arbitration, mediation, or court action. 

What Are Lien Rights?

Mechanic’s lien provides contractors with security for unpaid services. It allows you to hold onto properties belonging to customers until you receive payment for services rendered. For example, assume you are contracted to remodel a company’s commercial property. You organize the project, purchase supplies, and hire sub-contractors. The company makes payment, but refuses to pay the arrears after the project is complete. If the contractor has a valid claim, they can apply to the court for a mechanics lien on the property for the unpaid amount. 

In Massachusetts, a mechanics lien is predominantly covered by statutes, although case law also provides authority on the matter. The law requires the existence of a written contract and compliance with a strict procedure when enforcing your rights through a mechanics lien. Failure to comply with the rules can invalidate the lien. It’s best to consult an experienced attorney to assess your claim and help you through the process.

Legal Actions When a Client Refuses to Pay a Contractor

There are various legal steps you can take when a client refuses to pay for work done. These are:

1. Demand Letters

A demand letter is a letter one party sends to the other demanding the recipient do or refrain from doing a particular act, like the payment of monies due, within a specified period. An attorney typically prepares demand letters according to the client’s instructions. It sets the stage for negotiation and informs the recipient that the sender intends to take legal action should they fail to take the steps detailed in the letter. 

2. Mediation and Arbitration

Mediation and arbitration are alternative dispute resolution mechanisms to avoid litigation. Mediation and arbitration are consensual procedures, meaning both parties must agree to resolve or attempt to resolve the dispute through that means. The consent may be obtained through the main contract or a subsequent agreement, but the court may also direct the parties to attempt to settle this way. 

In a typical mediation procedure, a neutral third party, called the mediator, assists the contractor and clients in finding a resolution. The mediator does not decide the matter. Instead, they facilitate and encourage the parties to settle. If the parties use a court-appointed mediator, the details of the agreement would be presented to the court, where a judge approves and signs it as a judicial decision. Where the parties cannot find an agreement, they can proceed to court like usual.

Arbitration is consensual and involves a third party called the arbitrator — or a panel of arbitrators — but the arbitrators make the final decision without a judge or mediator. The arbitral award binds the parties without court approval and can only be set aside in limited instances.

3. Lawsuits

Contractors may sue for non-payment. There are different causes of action you can bring to court depending on the facts of the case. Here are two examples:

  • Breach of contract: Breach of contract claims allow you to claim for monies owed based on the terms of the agreement.
  • Quantum meruit: Meaning “the amount one deserves,” quantum meruit allows you to claim for the value of services rendered without an enforceable contract. 

Before filing a suit to recover payments due, gather all relevant evidence, including correspondents, contracts, receipts, pictures, and witnesses. It’s best to hire an experienced construction attorney to increase your chances of success.

Can a Client Refuse to Pay a Contractor for Poor Work?

Clients also have rights and can raise defenses when you file a claim. They may claim that you failed to meet the project specifications or that you breached your agreement terms as a reason for not paying. The court will assess both claims before making a determination.

How to Handle Disputes When a Client Refuses to Pay

Here are two effective ways to handle disputes regarding a client’s refusal to pay for services rendered:

1. Communication and Negotiation

Maintain clear communication with the client and ensure you have records of the correspondence. It’s best to communicate through letters and emails, so you have evidence to back your claims. 

Negotiation requires tact and skill. Keep calm throughout the process and pay attention to the little details. It’s also helpful to have a best alternative to a negotiated agreement (BATNA).

2. Working With a Legal Representative

Attorneys have experience in dispute resolution — they are trained for that. However, you must hire a lawyer with knowledge of handling construction disputes and an excellent track record. Lawyers can provide ongoing legal advice and represent you during settlement, arbitration, or court proceedings.

Partner With Calabrese Law Associates Today

The construction attorneys at Calabrese Law Associates can assess whether you have a valid legal claim and help you recover payment for services rendered. Our professionals have practical experience helping contractors and sub-contractors in the Greater Boston Area and throughout Massachusetts. Do you want to learn more about how we can help you? Contact us now!

Partner with Calabrese Law Associates

This publication and its contents are not to be construed as legal advice nor a recommendation to you as to how to proceed. Please consult with a local licensed attorney directly before taking any action that could have legal consequences. This publication and its content do not create an attorney-client relationship and are being provided for general informational purposes only.

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