The Right to Stop Work

because it makes the parties to the contract aware of the consequences of nonpayment. It specifically grants the Contractor the right to stop work and gives the Owner a reasonable period of time in which to cure its nonpayment before the Contractor may suspend its performance. Notice of default is almost always a part of such a provision and is a good step since the unpaid party's notice of its intention to stop work encourages negotiation and provides the defaulting party an opportunity to cure the payment.

Care should be taken not to confuse a "stop work" provision with a "termination" provision. Many contracts contain both provisions and are intended to address different situations. A stop work provision typically allows you to temporarily suspend your performance due to nonpayment, but requires you to return to work after receipt of payment or the completion of other satisfactory arrangements. A termination provision, on the other hand, allows you to permanently suspend your performance upon the occurrence of stated events. A nonpayment giving rise to a right to terminate is usually more serious and longer-lasting than a nonpayment giving rise to a right to temporarily stop work. Be sure you are familiar with the differing scope and application of these two provisions before you exercise your rights to stop work or terminate.

The importance of following the procedures in the contract for stopping work or terminating the contract cannot be overemphasized. A right to stop work or terminate can be converted to a default by the failure to comply with the contract requirements.

If your contract or subcontract does not specifically allow you to stop work if you are not paid, your right to suspend your performance is governed by general principles of contract law. You generally have a right to stop work if the owner's breach is a material, uncured failure of its contractual obligation. This means that, absent some other material harm to you, you normally cannot stop work after the owner cures its default by paying the amounts owed to you. By far the most difficult issue in this scenario is the determination of what constitutes a "material" failure to pay or, in legal terms, a material breach of the contract.

No one can predict with certainty whether a given nonpayment is a material failure to pay, since it is a question of fact which would ultimately be decided by an arbitrator, judge or a jury based on all the relevant facts and circumstances. A wrongful suspension of work can expose the contractor to a damage claim by the owner. Accordingly, it is important to analyze each circumstance on its own facts.

Certain conditions are usually given significant weight in determining whether a party's failure to pay is a material breach. These include:

1. The extent to which you will be deprived of the benefit which you reasonably expected;
2. The extent to which you can be adequately compensated for the nonpayment;
3. The extent to which the nonpaying party will suffer forfeiture;
4. The likelihood that the nonpaying party will cure its default, taking account of all the circumstances including any reasonable assurances; and
5. The extent to which the behavior of the nonpaying party complies with standards of good faith and fair dealing.

Of these factors, perhaps paragraph 4 is the most crucial.Consideration of the amount of money that is unpaid, in relation to the amount previously paid and the amount yet to be paid, together with the likelihood that the failure to pay can be cured, provides an idea of whether the nonpayment is serious enough to constitute a material breach. Florida courts have generally taken the position that failure to make progress payments constitutes a material breach of contract, thereby justifying a contractor terminating its performance.

Before stopping work or terminating a contract, the contractor should pay careful attention to the terms of any performance bond. Performance bonds generally provide a guarantee that the contractor will complete the work in accordance with the terms of the contract. A surety bond is not an insurance policy. Rather, it is a guarantee made by a surety company that certain work will be performed in accordance with the contract. The primary obligation to perform the work remains with the contractor. If the surety must complete the work or pay damages arising out of the contractor's failure to complete the work, it will seek indemnification from the contractor.

For this reason, in deciding to terminate a contract, the contractor must work carefully within the bounds of its suretyship agreement and the terms and conditions of the specific bond issued for the project. If the bonding company can be convinced that there was a "material breach" it will, in turn, notify the owner that the surety is no longer obliged to guarantee the contractor's performance.

If the surety fails to cooperate with the contractor in its decision to stop or terminate the contract, the contractor may find itself engaged in litigation not only with the owner but with its own surety. Further, whether or not the surety agrees to cooperate with the contractor, a claim by the owner under the bond may diminish the bonding capacity of the contractor, potentially impairing the contractor's ability to obtain new work.

Generally, you are better off having a stop work provision in your contract that spells out the rights and duties of the parties upon nonpayment. The most helpful stop work provisions will spell out the parties' obligations, allow for adequate notice, and avoid general terms that may be subject to conflicting interpretations.

In considering a stop work provision for your contract, keep the following in mind:

1. Since one virtue of a stop work provision is predictability, be sure your stop work provision addresses all non-payments, and not just material non-payments. This will help avoid disputes over the meaning of relative terms such as "material."
2. Look for language requiring you to make the obligated party aware of the nonpayment and provide it with an opportunity to cure the nonpayment.
3. Be certain that the provision addresses your rights if the obligated party does not cure the nonpayment within the requisite period, including such issues as the right to suspend performance, recover damages for shutdown, delay and start-up, and the right to terminate the contract.

Stopping work is a last resort measure and should be taken only in extreme situations. Never make a decision such as this in the heat of the moment. Always consult your attorney and discuss the situation prior to acting.