The Mississippi Court of Appeals has reaffirmed that a subcontractor must file a "Stop Payment Notice" prior to an owner making full payment to the general contractor. Otherwise, the subcontractor loses any hope of payment from the owner based upon that notice and the exclusive remedy for payment is against its general contractor.
In the recently published decision of Summerall Electric Co., Inc., et al. v. Church of God at Southaven, the Church of God at Southaven ("the Church") entered into a contract with an unlicensed general contractor for the construction of a new church. The general contractor engaged a number of subcontractors who performed work on the church but were not paid by the general contractor. The subcontractors filed "construction liens" against the church’s property. However, the subcontractors did not take this action until after the owner had already paid the entire contract amount to the general contractor.
The subcontractors advanced a number of arguments seeking to recover their money directly from the Church.
- The first argument was that the filing of the "construction liens" gave the subcontractors the right to recover against the Church. The Court disagreed because the Church had already paid the general contractor in full when the subcontractor’s notices were filed. For that reason, the subcontractors were mere creditors of the general contractor with no right to recover from the Church.
- The next argument was that because the Church entered into a contract with an unlicensed general contractor the Church should be liable. Under Mississippi law, a construction contract is null and void if a license is required for that contract. The subcontractors apparently argued that because the general contractor was unlicensed the prime contract was null and void and the Church therefore owed payment directly to the licensed subcontractors. The Court disagreed again, finding if the prime contract was null and void, then nothing would be owed to the general contractor and therefore the subcontractors would have no remedy either.
- Finally, the subcontractors argued that there was an "agency relationship" between the prime contractor and the Church which bound the Church directly to the subcontractors. The Court rejected that argument too on the basis of insufficient evidence.
In the end, the subcontractors were left "holding the bag." The real lesson here is for both subcontractors and general contractors. Know when you are required to be paid and, if payment is late, exercise your remedies under the contract document and the appropriate payment statutes. The saying: "He who hesitates is lost", is not just a cliché but a truism that cannot be ignored in these difficult economic times.