When a contractor fails to pay a subcontractor or supplier, the contractor takes a risky path. Even if the contractor doesn’t pay the subcontractor because he himself hasn’t been paid by the owner, it certainly isn’t good for business. Subcontractors and suppliers may, of course, refuse to engage in future projects with the contractor, and if the unpaid subcontractors and suppliers enforce lien rights on the property, the owner won’t be happy. If the owner has already paid the contractor, he may be furious. In addition, the contractor may end up facing additional liability from the unpaid subcontractors and suppliers, as explained below.
General Rules for Interest and Attorney Fees
Usually, parties to a construction contract can agree upon an interest rate that will apply to unpaid amounts, and if the contract results in a lawsuit, whether a non-breaching party can seek attorney fees and other collection costs is usually governed by what the contract says. If the parties do not agree to an interest rate in the written contract, Utah’s statutory interest rate of 10% may apply. If the parties do not agree in a contract to pay attorney fees and collection costs to a non-breaching party, the winner in litigation typically must pay his or her own attorney fees (but maybe not all costs). This is the American rule for attorney fees—both parties pay their own.
These general rules stated above may change when a contractor receives money on a construction project and then fails to pay a subcontractor or supplier. The unpaid subcontractor or supplier may be entitled to interest, attorney fees, and costs that were otherwise unavailable. Specifically, a Utah payment statute explains that an interest rate of 12% per annum may apply, which is slightly better than the statutory rate of 10% that probably applies if the contract does not state another rate. More importantly, if the unpaid subcontractor or supplier sues the contractor, the contractor will have to pay attorney fees and other collection fees, so long as these expenses are reasonable.
This can be a big deal. The ability to recover attorney fees is often the difference for the subcontractor between walking away and collecting the unpaid amount. Without this statute, unpaid subcontractors may be out of luck—they may not have preserved their lien rights, and it might not make sense for them to sue the contractor. For instance, if a subcontractor is only owed a few thousand dollars and the contract does not provide for attorney fees, it may not feel comfortable pursuing the claim in small claims court, and even if the amount owed exceeds the small claims limits, the cost to hire an attorney may be too great. Even if the subcontractor wins the lawsuit, the net result may be a loss after factoring in attorney fees and other unrecoverable collections expenses. In short, litigation can be expensive, even without considering the risks of losing—so expensive, in fact, that it unfortunately deters parties from pursing their legal rights.
But if a subcontractor knows that the contractor was paid on the project and still has money (i.e., is not insolvent or judgment-proof), the risk of litigation—even to recoup a small contract amount—may not be so drastic (and of course the increased interest from 10% to 12% is a nice little bonus). A party may be more willing to hire a Utah collection attorney to take the case to court, if necessary. Even if the case does not go to court, once the contractor receives a demand letter from an attorney explaining the law and the contractor’s liability for attorney fees and other collection costs, the contractor may quickly cave in and pay up.
Application to Subcontractors
The same risks described above apply to subcontractors who receive money on a construction project and fail to pay their subcontractors and suppliers. The Utah payment statute discussed above explicitly explains this. So, if an owner pays a contractor who pays a subcontractor who fails to pay a second subcontractor, and the second subcontractor sues the first subcontractor, the first subcontractor may be responsible for attorney fees and collection costs.
The only clear defense to contractors (and subcontractors) who fail to pay their subcontractors and suppliers after being paid on a construction project in Utah is actually not a very clear defense. The Utah payment statute discussed above states that payment must be withheld “without reasonable cause.” So, if the contractor (or subcontractor) has a good reason for not paying, it may escape the enhanced penalties, the main penalty being attorney fees. What a court considers to be good or reasonable cause is ultimately up to the judge or jury who determines factual issues like this.
Also, trigger-happy subcontractors and suppliers must wait at least a few weeks after not receiving payment to benefit from this statute. The enhanced penalties do not kick in unless the contractor (or subcontractor) does not pay for a period of thirty days after receiving funds.
Subcontractors and suppliers are unwise to rely on the Utah payment statute discussed above. It is far better to simply enter a written contract that sets forth an interest rate of at least 12% per annum (or more if it can be negotiated) and to include an attorney fee provision in the event the contract goes south.
It goes without saying that contractors and subcontractors can prevent the problems like the ones discussed above by paying their subcontractors and suppliers immediately when they receive payment. It is as simple as that.
Help with Payment Issues on Construction Projects
If you are a contractor, subcontractor, or supplier who has not been paid on a construction project in Utah, I am happy to help. I offer free consultations. My direct dial is 801-365-1021, and you can e-mail me at [email protected].