General contractors are the backbone of residential and commercial construction. They are trusted by thousands of Texans each day to keep construction projects moving forward. General contractors often use subcontractors to keep their projects on schedule and complete construction on time. When a general contractor does not pay their subcontractor, what happens? There are many situations in which a general contractor might withhold payment from a subcontractor, but is that even legal? When you entrust a general contractor to pay subcontractors working on your construction project, are you liable if a subcontractor does not get paid? Let’s find out.
It is not legal for a general contractor to withhold payment to a subcontractor if that subcontractor has fulfilled their portion of a contract by fully performing satisfactory work. This may be a plumber, painter, electrician, carpenter, or another skilled worker who has been subcontracted for their specialty. If they have not been paid because the general contractor does not believe the subcontractor has fulfilled its duties under the contract, that subcontractor may be looking for a way to obtain compensation for their work. A general contractor can be considered in breach of contract if they do not pay their subcontractors on time pursuant to the terms of the written contracts between them. The area is a bit gray when it comes to verbal contracts and/or when the terms of a contract are unclear. Subcontractors can fight for their rightful compensation, but a legal battle may take months if not years and may take a subcontractor away from their work.
Prompt Payment to Contractors and Subcontractors
The Texas Legislature has provided subcontractors other avenues for seeking compensation owed for work performed. The first option is the Texas Prompt Payment Act sets a timetable for contractors to pay subcontractors after they have received payment from a property owner or project owner. Under this Act, once a general contractor has received payment from the project owner, they have seven days to pay each of the subcontractors their portion of the payment under their contract. The subcontractor, upon receiving payment, then has seven days to pay their own subcontractors if they have any, and so on. When a general contractor does not pay their subcontractors, they directly violate the Texas Prompt Payment Act and there are severe penalties. When the Texas Prompt Payment Act applies to a construction project, it requires that the unpaid amount due to the subcontractor start to accrue interest on the day after payment was due at a rate of 1.5 percent each month. If the subcontractor feels as though they will never receive payment, they can file a contract dispute lawsuit. The Act also shifts the payment of legal fees, which requires the losing party in the lawsuit to pay all attorneys’ fees.
Fiduciary Relationship Between Contractors and Subcontractors
Subcontractor payments are also governed by Texas Property Code 162, also known as the Texas Construction Trust Fund Act. This Act protects subcontractors and construction material suppliers for their work on construction projects. The Act requires that the money the property or project owner pays to the general contractor for labor and materials furnished by subcontractors and suppliers be held in trust for those parties. The funds are then treated as a trust fund and the unpaid subcontractors are seen as trust fund beneficiaries with all rights to those funds. The general contractor is considered the trustee of that trust fund and is obligated to uphold its fiduciary responsibilities. If the general contractor knowingly breaches their fiduciary duties by not paying their subcontractors from the trust fund or engaging in other bad behaviors like self-dealing, they will be forced to pay the funds by law and will be subjected to additional legal penalties.
Texas Mechanic’s Liens
A third option that can directly affect a property owner is the subcontractor filing for what is called a “mechanic’s lien” against the property they have been working on. The subcontractor must first let the property owner know that they plan to file for the lien. Anyone seeking to file a mechanic’s lien must file a pre-lien notice – there are several types of notice and the legal requirements for each come with unique statutory timeframes within which the notice must be relayed. The property owner can choose to pay the subcontractor themselves, meaning they may have to pay more than once for a subcontractor’s service if the general contractor they used did not pay for the labor completed. A mechanic’s lien can be used to foreclose on the property as a means to collect a significant amount of money if the subcontractor is owed a major payment. The subcontractor could then sell the property and take the money they are owed from the proceeds of the sale. Under Texas Property Code §53-153, a general contractor is required to indemnify and defend the property owner and will be required in most cases to pay the subcontractor what is owed to discharge the lien.
Before a subcontractor starts down a more serious path of seeking what they are owed, they can first send one or multiple payment demand letters drafted by an experienced construction attorney to formally and legally request payment for the goods and/or services rendered. This is a good faith start before filing a lawsuit against the general contractor. Some general contractors know they are in the wrong and may be backed up on payments. Upon receiving a demand letter for nonpayment of an invoice, they may choose to pay instead of facing a lawsuit.
Houston, Texas Construction Disputes Lawyers
If you are a subcontractor facing nonpayment or a contractor being sued by a subcontractor, Feldman & Feldman can help. We have experience with all aspects of construction law and will advocate for a fair result on your behalf.