Recently I’ve seen an increase in disputes between prime contractors and subcontractors. Usually, the prime contractor fails to fulfil its payment obligations, or the subcontractor is not performing as agreed. These disputes are often the result of a non-existent or poorly drafted contract that both parties have refused to follow. Thus, you have parties engaged in high value deals, making up the rules as they move along. While I must stress the importance of drafting a solid agreement from the start, I will touch on how the law can protect the non-breaching party when there is no agreement or it is silent on these issues.
Oftentimes during the term of the agreement or relationship, one party fails to fulfil an obligation. For example, a prime contractor stops paying subcontractor for its services. Not wanting to lose the job, the subcontractor continues working without pay. Before you know it, the subcontractor has performed 4 months of services without any compensation. Subcontractor must still cover expenses. Parties should be aware that you are not required to continue working if the breaching party fails to pay for the completed and approved services within a reasonable time period.
In this case, the subcontractor may do any of the following:
* Request a bank guarantee from the prime contractor, so the subcontractor can draw against it when the prime contractor fails to make payment when due;
* Abstain from fulfilling its obligation until prime contractor has paid all outstanding payments;
* Request to terminate the contract; or
* File a legal action with the court, requesting a freeze on the prime contractor’s assets (eg, amounts owed to prime contractor by the client) until a final judgment in rendered in regards to the non-payment claim.
Moreover, there are incidents where the subcontractor threatens to stop its services, if the prime contractor pays amounts that are not due and/or more than agreed upon. In order to modify an agreement, there should be mutual consent, so the subcontractor cannot create new terms without seeking the prime contractor’s approval. If the prime contractor rejects the new terms, then subcontractor must continue performing as per the agreement. The subcontractor is required to perform the work in accordance with the contract, or perform as reasonably expected to complete the work. If the subcontractor stops performing its services, then prime contractor has the right to terminate the services and replace with a third party.
Lastly, prime contractors should be more cautious when entering into business arrangements without adequately protecting its interests because regardless of the wrongful acts performed by a subcontractor, the prime contractor is responsible to the client for all works performed.
By Najmah Mateese Brown, Esq.