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What is my recourse with someone who is trying to welch on a signed contract prior to the start of construction.

This is a two part question: first regarding liening a property seek payment for work performed and second about my ability to seek damages for lost earnings against someone who is trying to prematurely exit a construction contract. I have an executed construction contract with a customer. I began preliminary work on the project (tree removal, dirt work, obtained permit, window and door review, etc.). Then the original bank came back to the customer with an appraisal much lower than contract value. I recommended another bank for the customer to use, however they decided to go with another bank - Iberiabank, which required a lot of personal and financial information from the builder which I voiced displeasure with but told the customer that I would be happy to jump through any hoops if this is the bank the customer felt strongly about using. At this point the customer told me that they wanted to put the project on hold and asked me to send them an invoice for my work completed to that point. I sent them an invoice (~$6,000) for the work that had been preformed on the property as well as my time. They responded to this email that they would not pay my invoice until provided with detailed subcontractor invoicing and that due to my unwillingness to work with Iberiabank (not true) that they desired to cancel our contract. Up until this point our relationship had been very cordial. I believe they have found another contractor that offered a lower price and are trying to find a reason to cancel our contract. I would like to know my best course of action to 1) receive payment on my invoice 2) seek any damages for an early contract exit - this was a significant project and potentially represented around $100,000 in profit

1 reply

Jan 27, 2020

It's always a pain in the rear when a customer cancels a contract early into the project, especially when there are significant payments outstanding. Let's look at some payment recovery tools, then at the potential for recovering damages for a contract that's prematurely and/or improperly terminated.

Payment recovery tools for debts on an unfinished project

First, note that mechanics lien rights are generally available even if the claimant wasn't allowed to finish the contract, and even if there's a dispute as to what they're owed. Mechanics lien rights will be available to those who have permanently improved the project property and have gone unpaid for that work - and if payment is outstanding for work performed, a lien may well be available to aid in that recovery. Of course, mechanics liens are generally the nuclear option. So let's look at some other, less-adversarial tools first.

Invoice reminder

Simple invoice reminders might not be terribly valuable if there's a full-on dispute at hand, but they're still worth discussing. An invoice reminder is just like it sounds - it provides a reminder that payment is outstanding to the nonpaying customer.

Demand letter

Escalating things a bit further may be necessary if there's already a payment dispute at hand, and a demand letter can certainly do that. Demand letters will generally include specific legal threats and create a concrete timeframe for making payment. So, they'll let the customer know that nonpayment won't be tolerated and that the matter must be resolved soon - otherwise further action will be necessary.

Notice of Intent to Lien

As mentioned above, lien rights may well be on the table if some work was done to the property but not paid for. And, because mechanics liens are such serious business, the mere threat of a lien claim is a powerful tool, in and of itself. So, sending a Notice of Intent to Lien can go a long way toward getting paid, especially when a customer knows they've been improperly denying payment. Further, sending the Notice of Intent to Lien to a lender, in addition to the property owner, can help to resolve a dispute since that lender may put additional pressure on the owner to resolve the matter so it won't interfere with the viability of the investment.

Pursuing a mechanics lien claim

As discussed earlier, a mechanics lien claim can be a powerful payment recovery too, itself. This is especially true when there's a lender on the project also taking security via the project property (like a construction mortgage). You can learn more about how liens lead to payment here: How Do Mechanics Liens Work? 17 Ways a Lien Gets You Paid Notably, though, under the new rules imposed by HB 203, a claimant's lien priority won't relate back to when grading or clearing work was done in preparation of placing a building on the property. A lien claimant could still pursue a lien for that type of work. However, the fact that the work (potentially) took place before a lender took security in the property won't necessarily mean that a lien's priority will supersede the lender's security. Rather, the lien claimant's priority will be measured from when the lien is actually filed - it won't relate back to earlier work.

Legal claims

Finally, note that legal claims - such as breach of contract or wrongful termination, to name two potential options - may be on the table. So, if things really get nasty, pursuing legal claims could be a viable option for holding an owner accountable and forcing them to make payment. For the most clarity on what claims might be available, though, it'd be wise to consult with a local construction attorney so they can review your project documentation and advise on how best to move forward and get paid.

Recovering lost profits is an uphill battle, but not impossible

Finally, regarding the remaining contract price - note that lost profits can be incredibly hard to prove. However, when a contract has been terminated for blatantly weak reasoning, or when a third party has interfered with the agreement, it might be easier to pursue lost profits. For a deeper look into the viability of a claim based on lost profits and/or some other damages calculation, it'd be wise to sit down with your attorney. They can review the project docs, communications, and accounting, then advise on how best to move forward in pursuit of those claims.

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