A flooring installer client recently contacted me about a general contractor not paying on a commercial project. In those situations, I first ask: Why are they withholding the payment? Was your work defective? Is the GC in financial trouble? Has the property owner not paid the GC?
In this case, my client said the answer to all the questions was “no.” Instead, the GC was upset about the workmanship on a different project for which my client had already been paid in full. It is common for GCs to work with the same subcontractors on multiple projects. Whether the GC may withhold payment on one job due to issues on another depends on the legal doctrine of “setoff,” the laws of the state where the project is located and any written agreements between the parties. Under the doctrine of setoff, a debtor may reduce or eliminate liability to a creditor by considering the money the creditor owes to the debtor. While many states permit setoff by common law, equity or statute, some have limited the concept of setoff in the construction setting and have sought to protect payments to subcontractors through “prompt payment” laws. It is necessary to review state law to determine whether a GC may legally apply a setoff.
For example, GCs often require regular subcontractors to sign a “master” subcontractor agreement covering all future jobs. The master agreement states the legal terms, and for each project, the parties only document the scope of work and the price. Master agreements commonly contain setoff or “cross default” language allowing the GC to withhold payment for many reasons, including project problems.
In my client’s case, no contract allowed the GC to setoff funds between unrelated projects. Minnesota’s prompt payment law requires a GC on a commercial project to pay a subcontractor for “undisputed services” within 10 days after the customer pays the GC. Since the GC did not dispute the flooring contractor’s services on the project for which the payment was due, legally the GC could not refuse to pay on that project based on issues with a different project.
State laws vary regarding the right of setoff, but the answer usually depends on any contracts between the parties. Absent a contract allowing a GC to setoff between jobs, it likely cannot do so.
