Many subcontract agreements allow a general contractor to withhold payment on one project due to problems, like delays or non-conforming work, on another project. These provisions need only be a sentence long and can be hidden almost anywhere in the agreement. However, regardless of the length or complexity of the cross-payment clause itself, the provision can have wide-reaching impacts to many different projects.

From the subcontractor’s perspective, a cross-payment provision starves one or multiple projects for cash to complete the work.  From the general contractor’s perspective, protecting its interests across multiple projects may have unintended consequences with a project’s owner. Two major issues that come to mind first are mechanics’ liens under Chapter 53 of the Texas Property Code and the various prompt payment acts established for Texas public and private projects.

For liens, if the general contractor is withholding payment on a project wherein the only basis is a cross-payment provision, an astute subcontractor will immediately send notice of intent to lien the projects on which payment is being withheld.  The owner of the project that is having no delay, defect, or other issues will receive the notice and wonder why the general contractor has not already paid that subcontractor.  The owner will likely demand that the general contractor either pay the subcontractor or purchase an indemnity bond for the lien.  In addition, many prime contracts have provisions that prevent the general contractor and its subcontractors from liening the project.  While the cross-payment clauses may provide some leverage for the general contractor, they may also create an unwelcome surprise when the owner sends a notice of default to the prime contractor for not paying the subcontractor and the subcontractor filing a lien against the project.

As for the various prompt payment acts applicable to public and private projects, unless the general contractor follows all the steps to properly withhold payment because of a good-faith or bona-fide dispute, whatever the case may be, it could be liable for interest and attorney’s fees for payment received from the owner but not paid to the subcontractor. Also, the subcontractor may have the legal ability to suspend its work on the project if not paid pursuant to a prompt payment act, causing a whole slew of new problems for the owner and general contractor. The Texas prompt pay acts for both public and private projects cannot be waived by contract.

If you should have any questions regarding cross-payment provisions or other risk shifting mechanisms in construction contracts, please contact the attorneys in our Austin or Dallas offices at info@gstexlaw.com.

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