EVERY SUBCONTRACTOR has had to deal with slow payment by general contractors who claim that it’s not their fault – the customer hasn’t paid them and, in a slow economy, this refrain is heard more and more frequently.

As sympathetic as the sub might feel, the unfairness of being held up due to a problem you had nothing to do with is more than just irritating, especially when you’ve already had to pay the bills for that work. The temptation to just stop working is hard to resist, even though general contractors may be making serious threats and pointing to contract clauses that (they say) require the sub to stay on the job.

A Virginia drywall contractor’s frustration caused him to take the chance, and it ended him up in court.

Manganaro Corp. was a sub to HITT Contracting for a Lucent Technologies project in downtown Washington . Although Manganaro’s subcontract had a strongly worded “pay if paid” clause (“Contractor’s receipt of payment by the owner shall be a condition precedent to the obligation of the Contractor to make any payment to the Subcontractor”), Manganaro had had the foresight to negotiate in another sentence that took most of the teeth out of this clause: “Notwithstanding the above, it is understood the Contractor has the ultimate obligation to pay the Subcontractor within a reasonable time regardless of payment status from the Owner.”

When payment was not forthcoming – due to non-payment by Lucent – after much discussion and correspondence, Manganaro suspended work. HITT got another contractor in to complete the work and back-charged Manganaro. The next step was federal court.

The judge found first that while a “pay if paid” clause might be enforceable in Virginia , this clause was not, given the extra language Manganaro had negotiated into the contract.

The next question was: “What’s a reasonable time for payment?” HITT argued that Manganaro had not given it enough time to at least try to collect from Lucent, but the court decided that Manganaro didn’t have to wait at all. Accepting Manganaro’s testimony that 30 days from invoice was a “reasonable” amount of time, the court ruled that HITT’s persistent failure to pay within 30 days was unreasonable. Although there were no Virginia court decisions directly on this point, “the authorities uniformly state that a subcontractor who is unreasonably denied payment as he progresses towards completion is justified in suspending performance until he is paid.” Manganaro Corp. v. HITT Contracting Inc., 193 F. Supp.2d 88, 96 (D.D.C. 2002)

HITT argued that even if it was in breach of contract (and it tried hard to convince the court that its delay in payment hadn’t been all that bad), not every breach of contract justifies the other party’s refusal to perform. The court agreed that this had been the law in Virginia for more than 100 years, and that some breaches can be remedied by a payment of money damages after the fact – such as interest, for late payments.

Ironically, one of the reasons why the court went against HITT on this point was that HITT had inserted in its contract the sentence, “Time is of the essence.” While HITT (and most other contractors) intended this clause to apply to Manganaro’s obligation to perform, the court read it as applying both ways: It meant that HITT had to perform its obligation to pay in an expeditious manner.

The case was particularly difficult for the judge to decide, since Manganaro’s billings were not entirely accurate, and HITT could (and did) argue that it thought it was making the appropriate payments, or at least partial payments. The court ruled that it had to look at the objective facts of what Manganaro was really due, since HITT’s own records would have shown that Manganaro was due $140,079 when it suspended performance.

“HITT’s breach of its most fundamental contractual obligation to pay for the work it approved relieved Manganaro of any further obligation under the contract, including the obligation to [do extra work] and to do the repair work on the punch list.”

Not every slow-pay situation will justify suspension of work, given that business relations will inevitably be scarred if not totally ruined in the process, and even with interest of $27,753.60 thrown in, Manganaro was probably not made whole for all the expense it incurred in taking this dispute to federal court. Nevertheless, I expect to see the words of this decision quoted by many lawyers for subcontractors in letters and legal briefs on the subject of slow payment. And the words just might find their way into some court decisions in other states.

About the AuthorSusan McGreevy is a partner at Husch & Eppenberger , Kansas City, Mo. , 816/421-4800, e-mail to susan.mcgreevy@ husch.com.  This article was first published in Contractor Magazine, the Newsmagazine of Mechanical Contracting and is reprinted with permission.  Penton Media, Inc.; 2700 South River Road, Suite 109; Des Plaines, IL 60018; Tel: (847) 299-3101.

ConstructionRisk.com Report, Vol. 5, No. 3 (Apr 2003)