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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.

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In these difficult economic times, an Owner and/or Contractor may be tempted not to make full and final payment after the work is complete and there is beneficial use and occupancy of the facility. The Owner and/or Contractor may justify this conduct even though there is not currently a problem with the work because there "may" be unanticipated future problems with that will need to be addressed. However, withholding payment for potential defects or warranty issues could turn out not to be a wise decision.

An Owner and/or Contractor’s "belief" that it may have warranty claims sometime in the future may be insufficient to justify withholding of final payment as explained by the Mississippi Supreme Court in Crawford Commercial Constructors, Inc. v. Marine Industrial Residential Insulation, Inc., 437 So.2d 15 (Miss. 1983). In that case, a subcontractor sued the general contractor for payment under a roofing contract. The general contractor had refused to pay the subcontractor on the basis that it "believed the roof was improperly installed, so that [the general contractor] will ultimately be required to repair it to satisfy the building’s owner." Id. The Court ruled that the general contractor’s "beliefs" were conjectural. Id. at 16. In affirming the trial court’s decision in favor of the subcontractor, the Mississippi Supreme Court stated:

Under our authorities there must be a present, existent actionable title or interest which must be completed at the time the cause of action is filed. (citations omitted). A mere inchoate right is not sufficient and neither is a prospective danger of injury. (citations omitted)…"It is certainly an undisputable and invariable rule of law that a right of action must be complete when an action therefore is commenced…."…"we consider it to be the well-settled, general rule, that the facts which constitute the ground of a suit must exist at the time the suit is instituted…"

Id. at 16.

In addition to this jurisprudence, Mississippi has enacted what are generally known as "Prompt Payment Statutes" for both public and private construction contracts. Both of these statutes require timely final payment once the contract has been determined to be substantially complete or there has been beneficial use and occupancy. There are also "Late Payment Interest Statutes" which apply when a contractor fails to make payment "without reasonable cause" to its lower tier subcontractors or suppliers within fifteen (15) days after receipt of payment.

There is no provision for recovery of attorneys’ fees in either the "Prompt Payment Statutes" or the "Late Payment Interest Statutes." Contractors therefore need to ensure the issue of attorneys’ fees associated with collection efforts are adequately addressed in their contract documents.

You can expect this case law and these statutes to be cited frequently in payment disputes during these difficult economic times.

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