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Contractor Entitled to Stop Work After Owner Fails to Make Payment Certified by Architect, Montana Supreme Court Rules
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June 4, 2007
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(A revised version of this article will appear in The Construction Lawyer, Volume 27, No. 3, Summer 2007, published by the American Bar Association's Forum on the Construction Industry.)
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Thelen Reid Brown Raysman & Steiner LLP
Owner hired contractor to build 15 condominium units in Montana. The original contract completion date was February 1, 1992, and the contract provided for an early completion bonus and liquidated damages for delay.
The contract also provided that the contractor would submit its monthly payment applications by the 5th day of the month; owner's architect would review the invoices and, if correct, would certify them for payment; and the owner would pay them by the 25th day of the month. The architect also had the right to withhold its certification of payment for specified reasons. The relevant provisions of the contract between owner and contractor provided:
Article 9.5.1 - The Architect may decide not to certify payment and may withhold a Certificate for Payment in whole or in part, to the extent reasonably necessary to protect the Owner, if in the Architect's opinion the [required] representations to the Owner ... cannot be made.... The Architect may also decide not to certify payment... because of: 1) defective Work not remedied; ... 6) reasonable evidence that the Work will not be completed within the Contract Time, and that the unpaid balance would not be adequate to cover actual or liquidated damages for the anticipated delay..
Article 9.7.1 - If the Architect does not issue a Certificate for Payment, through no fault of the Contractor, within seven days after receipt of the Contractor's Application for Payment, or if the Owner does not pay the Contractor within seven days after the date established in the Contract Documents the amount certified by the Architect or awarded by arbitration, then the Contractor may, upon seven additional days' written notice to the Owner and Architect, stop the Work until payment of the amount owing has been received.
Fourteen of the fifteen units were not completed by the original schedule date. In addition, the owner claimed to have backcharges for defective and incomplete work. In May 1992, architect certified $83,141.50 for payment. Thereafter, the owner withheld certain sums from the contractor on account of delay, defective and incomplete work, and unperformed warranty work. The contractor provided the owner with written notice that it would stop work on the project.
The contractor filed a construction lien and commenced an action. The owner counterclaimed. The trial court ruled that the contractor was contractually obligated to perform punch list and warranty work and awarded the owner its costs to complete the contractor's obligations.
The Supreme Court reversed, based on the unambiguous contract provision cited above that allowed the contractor to cease its performance if the owner failed to make a payment certified by the architect. James Talcott Construction, Inc. v. P&D Land Enterprises, 333 Mont. 107, 141 P.3d 1200 (2006).
The court might have come to a different decision if the owner had asked the architect to withdraw or modify its certification of payment or if the contract had permitted the owner some latitude to withhold payment based on its assessment of backcharges, claims and credits. In addition, although this issue does not appear to have been part of this case, such latitude could be needed if an owner's reasons for withholding payment involve delays, defects or incomplete work for which the architect and contractor shared responsibility.
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For more information about the issues covered in this report, please contact John Ralls in our San Francisco office at 415-369-7210 or at jralls@thelen.com or contact your Thelen attorney. For more information about Thelen's Construction and Government Contracts Department, click here.
©2007 Thelen Reid Brown Raysman & Steiner LLP
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