Legal Topics

By Michael T. Nigro

Every subcontractor encounters the situation where he is not receiving timely progress payments. Suspending your work can be a powerful tool to get paid. However, knowing when and how to comply with your contract before suspending work is crucial. Properly suspending work will preserve your rights to payment for the work completed, unused material delivered, and lost profits. Improperly suspending work will not only place these rights in jeopardy, but expose you to substantial liability for the often exorbitant backcharges, completion subcontractor charges, delay charges, liquidated damages, and general contractor overhead charges.

A Successful Suspension

The case of B & C Electrical v. Pullman Bank and Talsma Builders, 97 Ill.App. 3d 321 (1981) illustrates the importance of suspending work properly. B & C, the subcontractor, stopped work when it was not receiving progress payments. It sued for about $97,000 for its completed work, unused material delivered, and lost profits. Talsma, the general contractor, counter-sued for completion subcontractor charges of $395,000, less the contract balance of $113,000, representing a net claim of $282,000. At issue was a swing of $379,000, the difference between obtaining a judgment of $97,000 versus owing a judgment for $262,000. Fortunately for B & C, the Court found it complied with its contract terms and rightfully suspended its work. Significantly, there were no contract provisions limiting B & C's right to suspend its work in response to the failure to make the contract progress payments. Thus, the Court awarded B & C a judgment for most of its claim and the counter claim was denied.

A Disastrous Suspension

In contrast, is the case of Ziegler v. Chicago Northwestern, 71 Ill.App.3d 276 (1979). Ziegler, a plumbing contractor, suspended its work when some of its claims for extras were not paid. Ziegler then sued for $52,000 for work to date, $58,000 for material furnished to the job but not used, and $30,000 for anticipated profits. The Court found that Ziegler's claims for most of the extras were not valid. The Court determined that under the reasonable interpretation of the contract, the claimed extras were Ziegler's responsibility. Therefore, Ziegler's suspension of the work was a breach of contract. Because Ziegler breached its contract, it could not recover for the unused material and lost profits. The Court did award Ziegler the value of the work it did perform.

Although not discussed, Ziegler, as the breaching party, would also have been responsible for the cost of completion less the contract balance. Often, the completion contractor's cost is the real "killer." Furthermore, a subcontractor will lose his Mechanic's Lien rights if his wrongful suspension of work results in his failure to substantially perform.

A Best Practice

Common law gives the subcontractor a right to suspend work, if progress payments are not made when due. However, your contract can alter that right. The best practice is to carefully examine the contract before you sign it. Make sure it clearly states the timing and rights to progress payments. Do not agree to any provision limiting your right to suspend work.

Suspending Your Work

Once the contract is signed and the general contractor has failed to make a progress payment you have the right to suspend work absent a contract provision to the contrary. Before you suspend work, examine your contract to make sure you are entitled to payment. For example, look for provisions that might restrict your rights to payment or suspend work. Find out if the general contractor has been paid or if the general contractor contends the owner is wrongfully withholding payment. Are the extras you claim authorized or requested in writing by the general contractor and beyond the scope of the original contract?

You should also check the contract for "pay if paid" and "pay when paid" provisions. In Illinois, "pay when paid" and "pay if paid" provisions are not a defense to a Mechanics Lien Foreclosure suit, but they may be a defense to a contract action against the general contractor. Check your contract for any notice provisions for suspension and/or termination of work. Also, make sure that you have provided the insurance certificates required by your contract.

Suspending your work when you have failed to comply with your contract provisions may result in not receiving payment for your work and, in addition, paying a substantial judgment for the completion contractor. You may also be liable for any additional damages provided in your contract. Careful analysis of your contract obligations and rights before you suspend work should save you from a financial disaster.

Before suspending work review your contract with an attorney experienced in construction law to make sure you are protecting your right to payment.

By Michael T. Nigro

A. Obtain the following information from each customer:

(1) Name of job, exact location of job or address, general contractor and phone number; and name of Owner.
(2) Legal description and bonding information, if any.

B. Apply payments to correct invoices.

C. If a waiver is requested, use a Partial Waiver Form. Do not use a Waiver of Lien to Date unless you back date waiver to the last invoice that is waived. All invoices prior to and including that date will be waived.

D. Attempt to tender waiver directly to the lender or Owner in trust to be used only upon payment to YOUR COMPANY. Send copies to the customer and the general contractor so that they know the waiver has been tendered. This will protect you from the customer who uses your waiver, receives payment and does not remit your portion thereof. By giving your waiver to the customer, you risk your customer defrauding you and terminating your lien rights by use of your waiver.

E. Typically, a Final Waiver of Lien waives all rights to material delivered or to be delivered in the future. YOUR COMPANY should have and use its own form for a Final Waiver of Lien that does not waive future deliveries.

SCOPE: Lien covers value of all material, equipment, and labor delivered to job for purposes of incorporation in the job and the rental value of leased equipment used on the job.

1. Effective August 17, 2007 there now is a right to recover for equipment rental except for single and multi-family residence of fewer than 12 units in a single building.

2. Consumer Remodeling
Within 60 days of your first delivery and before payment is made to the general contractor by the Owner, written notice is required to be served upon the Owner and the mortgage company by personal service or Certified Mail. The 90 day Notice and Claim for Lien must also be served on the Owner.

3. Business Remodeling or New Construction
Within 90 days of last significant work or material to complete your contract, a Notice of Claim for Lien must be served upon the Owner and the mortgage company by personal service or Certified Mail. Corrective work does not extend the last date of work.

You have no lien to the extent that the general contractor is paid based on a false contractor's affidavit which fails to list your company before service of your 90 day Notice.

4. Within four (4) months of your last work, a Claim for Lien should be filed with the Recorder of Deeds.

5. Even if the above has not been done, YOUR COMPANY may still have lien rights, if YOUR COMPANY was listed on a contractor's affidavit submitted to the Owner.

6. If you were employed by or sold directly to the owner, you are treated as a general contractor or original contractor. The 90-day Notice is not required. In that case you need to record your lien within four (4) months of your last work to prevail against the mortgage lender and third party purchasers and within two (2) years of your last work to prevail against the owner only.

7. Within two years of your last work or material, you must file suit to foreclose your lien.

State of Illinois, Municipalities and Political Subdivisions in State of Illinois ¬770 ILCS 60/23.

SCOPE: Lien covers value of all material, labor and rentals. This is a lien only on the funds yet to be disbursed to the general contractor.

1. Serve Statutory Notice of Claim for Lien before payment is made to the General Contractor.

2. Suit to Foreclose the Public Lien must be filed within 90 days of service of Notice of Claim for Lien and a copy of the Suit must be delivered to the Public Body within 10 days thereafter.

1. State of Illinois, municipalities and political subdivisions. 30 ILCS 550/1 and 550/2.

SCOPE: A payment bond is required by Statute to cover material and labor. It does not cover rentals unless the Bond has language indicating that it does.

a. Notice of Claim on Bond must be served within 180 days of last work or material delivered.

b. Even if payment has been made to the General Contractor, a suit may be commenced on the payment bond posted by the General Contractor within 180 days of final acceptance of the work by the public body.

2. Federal Jobs including all Departments and Agencies. 40 USC Sections 270(a) and 270(b).

SCOPE: Bond covers material, labor and rental.

a. If you have been employed by the general contractor, suit on the Bond must be filed within one year of the last day you provided material, labor or rental.

b. If you have been employed by a subcontractor of the general contractor, a Notice of Claim must be served on general contractor within 90 days and suit must be filed within one year of supplying the last material, labor, or rental.

c. If you have been employed by a sub-subcontractor, you have no rights under the Bond.

1. Failed to file suit after receipt of 30 day demand to sue request.

2. Provided Waiver of Lien to date which covers unpaid work provided before said date.

3. Recorded an intentionally inflated lien claim which may render the lien void.

4. Failed to comply with time limits for notices, recording and filing suit.

5. Owner paid General Contractor pursuant to Contractor's Affidavit before the Notice of Claim is served. (This does not apply to Bond Claims.)

Prepared by:
Michael T. Nigro
NIGRO & WESTFALL, P.C.
Attorneys at Law
1793 Bloomingdale Road
Glendale Heights, IL 60139
(630) 682-9872
fax 580-5696

web site: nigrowestfall.com
(All copyrights reserved: Michael T. Nigro: published in ASA Chicago Construction News, 2002 and on web site and updated September 2007.)