Grounds for Suing as a Contractor
There are several legal grounds upon which contractors can sue for non-payment. Most of the time, these are related to breach of contract, though they may also include claims for unjust enrichment and breach of other statutory rights. For the most part, whether any particular claim is appropriate will depend upon the circumstances of a particular case.
Breach of Contract. Virtually every contract contains promises made by both parties. For example, the contractor agrees to complete the work in accordance with the plans and specifications and the owner agrees to compensate the contractor in accordance with the payment schedule contained in the contract. The precise terms of the contract will determine whether a party has breached the contract. For example, if the contractor finishes the work, but it is not in accordance with the plans and specifications, then the owner’s refusal to pay may not constitute a breach of contract , whereas if the contractor’s work is completed in accordance with the plans and specifications and at a cost not in excess of that detailed in the contract, but the owner refuses to pay, then the owner may be in breach of contract.
Subrogation. A property owner usually requires their general liability insurance carrier to defend lawsuits brought against the property owner for a breach of contract by its general contractor. To the extent that the insurance company pays any sums owed by the contractor to the property owner pursuant to the policy’s general liability insurance coverage, then the insurance company may assert a subrogation claim against the contractor for those sums paid.
Unjust Enrichment. In many cases, it is possible for a contractor to prevail on a claim for quantum meruit. To establish a claim for quantum meruit, the contractor must prove (1) it has conferred a benefit upon the property owner, (2) the owner appreciated or knew about the benefit, and (3) there is an agreement between the contractor and the owner that Payment was expected.
What to Do Before Suing Your Client
Before an owner can be sued for non-payment, the contractor must first provide proper notice to the owner, demand payment, and, in some cases, resort to mediation and/or arbitration to resolve the dispute. Parsing through the specific facts and terms of your contract is imperative to determine what methods the contractor must use to recover the funds. The contractor’s first step is to send the owner a demand for payment notice. This notice should contain the demand amount, a payment deadline, and a warning about additional steps that will be taken if the owner fails to pay. Some construction disputes warrant the use of mediation or arbitration as a preliminary step before filing suit, which means the contractor may have to pursue one or more of these options. Mediation is a process in which an unbiased third-party attempts to help the parties reach a mutually acceptable agreement. While mediation does not guarantee a resolution, it does allow the parties to avoid the cost and the time associated with filing a lawsuit. Arbitration is different in that it allows an arbitrator (a neutral third-party) to make a decision for the parties. Much like the mediation process, arbitration provides the parties with an opportunity to avoid the time and cost associated with a trial and judgment. If any of these options are required by the contract, it is important to raise them as soon as possible.
Using a Mechanics Lien as an Alternative to a Lawsuit
The ability to file a mechanics lien is a potential tool that contractors can use to recover unpaid fees. A mechanics lien is a claim against an improvement on real property for payment for work performed on that improvement. By filing a mechanics lien, the contractor can force the sale of the property on which the work was performed. When a mechanics lien is filed, the Clerk will attach a lien to the property in question. This filing does not mean much at first, but, if the outstanding amount is not paid, the contractor can foreclose on the lien by selling the property in order to recover the outstanding balance owed for work performed. This is an attractive alternative to litigation and may provide the only opportunity for a contractor to recover its outstanding debts. However, it is important to understand that the laws governing the mechanics lien process are very strict, so it is imperative that contractors consult with an attorney to ensure that the lien is properly filed and preserved. If it is not, the mechanics lien will be considered void. For example one of the statutory requirements for filing a mechanics lien is that it must be filed within 90 days of the last date that services were provided. There are three potential benefits of filing a mechanics lien. First, the mere fact that a mechanics lien has been filed will often act as an incentive for the party that owes the money to pay. In addition, if the mechanics lien has been filed prior to the owner’s sale of the property, this can create problems for the sale of the property if there is a mechanics lien on the property. In effect, it will drive down the price of the property because the mechanics lien must be satisfied prior to completing the sale. Finally, a mechanics lien can provide a great deal of leverage in the negotiation of a lawsuit settlement. A mechanics lien, concurrent with the filing of a lawsuit to foreclose on the mechanics lien, can provide a lot of leverage to reach an acceptable settlement. Conversely, there are three potential limitations of a mechanics lien. First, unlike a lawsuit, a contractors’ mechanics lien needs to be recorded with the Clerk of Court in the appropriate county. This can be a limitation when a contractor is owed money for work performed on multiple jobs in multiple counties. Second, if the owner of the property files a counterclaim in an action to enforce a mechanics lien, the contractor may be liable for significant attorneys’ fees and costs. Finally, the amount required to undo a mechanics lien is often more than the amount owed. Mechanics liens typically require a payment of $2,500.00 in order to have them released so a lawsuit to foreclose the lien must be filed. Otherwise, the fee for negotiating a settlement with the owner will often exceed the amount due to have the mechanics lien removed. As a result, many times contractors will simply remove the mechanics lien.
What to Expect When Suing in Court
Many contractors are hesitant about filing a lawsuit because they do not know what to expect in the litigation and court process. Depending on your business, the attorney will proceed either in Lien Foreclosure or a lawsuit to recover your damages. Once you decide to pursue your claim in court, you will have initiated a mandatory step in your contract: to bring your dispute to the public forum and allow the law to adjudicate it.
The two most common ways to sue a non-paying customer are either by filing a lawsuit in Circuit Court or Liens Foreclosure Proceedings. A lawsuit in Circuit Court to recover your payment under your contract will require you to first file a complaint, which must include a short statement about the facts surrounding the debt, damages, and the requested relief. The complaint will also include an explanation of why the court has jurisdiction over the issue and venue. You will then have to file a summons with the complaint; this form informs the court that you intend to litigate your case. It is important to note that neither the court nor the office of the clerk, will draft this for you. They are not there to provide you with free legal services either. If you are unsure about the exact content needed for your documents the best course of action would be to retain the services of an attorney . While it may seem expensive to seek legal help, it may save you time, and lots of money in the end. The third option would be to retain the services of a third-party debt collector to collect on your behalf. Be forewarned that if your client wants to contest the lawsuit later on, they will have to face their arguments before a court of Law. Once you have completed your documents you will need to file them. To do this, you will first have to make hard copies of your documents. You can do this yourself, or you can take your documents to an office supply store that has paper-copying facilities to assist you. After returning all originals to the clerk’s office, your case will be assigned to a judge. Be sure to follow all court deadlines and provide all requested documentation to avoid inadvertently dismissing your case. Finally, you may receive a letter from the opposing party requesting mediation. You must attend, but it is common to reject these offers and to alternate a choice of settlement proposal with another dated response letter. If you cannot reach an agreement, the court will schedule a trial date and will advise you of the order of presentations. Alternatively, you may have to participate in a jury trial where jury instructions will be issued.
Considerations, Expenses, and Risks
When opting to pursue litigation as a means to collect outstanding sums, an important factor to consider is the economic and relational cost of pursuing that litigation. In other words, how much time and money will it take to prosecute a claim in Court? Will the costs of pursuing a claim outweigh the benefits to be gained by recovery? Closely related to these considerations are the relational costs of bringing a lawsuit. Will the lawsuit "poison’ future business dealings with the owner? On the other hand, depending on the course of conduct exhibited by the party, may the litigation be necessary to protect your business’ bottom line?
Finally, is the other party likely to pay a judgment that you receive, or will you be forced to have a Sheriff seize equipment and/or assets in order to satisfy a judgment? Litigation can be a bit like a game of poker – while bluffing and betting may occur at the actual hearing or trial, the enumerated factors above must be carefully balanced when deciding whether to "play your hand."
Protecting Your Business Against Non-Payment
To protect your business from non-payment, it is a good idea to have a solid contract with clear payment schedules, contingent upon milestone throughout your project. In other words, request partial payments for parts of the job that are already complete. This way, if the job is only half done and your client decides they no longer want you to finish it, they have no choice but to pay for the work you’ve already put in.
It is also important to check up on your clients to ensure that they can afford to pay you before you start working on their project. Remember to take advantage of consumer credit reports. One red flag that indicates a troublesome client is the use of multiple credit cards where only one card could have sufficed . Joint credit accounts with differing addresses, incorrect social security numbers and late payments on multiple loans are also signs that a client may not be able to pay.
Lastly, charge your clients interest on overdue payments. The proliferation of building supplies stores has done good things for the construction industry. However, they have also created a culture where it is somewhat acceptable for clients to pay bills late and then deal with finance charges later. By charging your clients interest on overdue bills, it is a way to make your clients respect your company and show them you- as a professional- won’t tolerate being disrespected.