Once parties head to litigation, all bets are off.
Otherwise rational executives can become emotional in their thinking. Sometimes that thinking includes the belief that “inflicting pain” or “having leverage” on the other contractor is a show of strength, necessary in litigation. That thinking often leads contractors to refuse to pay undisputed sums if they are in a payment dispute for different funds. That behavior can—and often does—lead to worse outcomes.
The next time litigation arises, consider the points below when faced with the situation of a lawsuit alleging sums that are genuinely disputed, and undisputed sums.
The scenario is simple: Three-quarters of the way through a project, a contractor has a dispute with a subcontractor regarding a change order. The subcontractor sues, so litigation is now inevitable. At that point, a contractor is likely in a position of owing the subcontractor sums that are not in dispute, and sums that are disputed. At that point, some contractors simply treat the litigation matter as an unresolved matter and do not pay the undisputed balance.
Below are some reasons to consider when deciding whether to immediately pay the undisputed funds.
The company owes the money
First and most importantly, the company owes the money. If certain balances are not in dispute, the company owes (and is likely under a contractual obligation) to pay the undisputed balance. Being in litigation is not an excuse to withhold undisputed sums. The company must pay any amounts that are not disputed in good faith.
The parties can remain more reasonable and posture the case for settlement
Paying the undisputed portions of the balance can encourage the parties to be fairer and more reasonable in their negotiations and throughout litigation. It shows the fight is saved for the matters that are truly in dispute. Payment of the non-disputed sums also creates an opportunity for each lawyer to consider the case more globally and often invites conversations of global settlements. If a company refuses to pay an undisputed balance, the opposing party can become more emotional because they consider the nonpayment a personal attack. The more reasonable the parties are, the quicker the case is usually resolved.
Withholding undisputed amounts usually results in higher fees and costs
The law has certain protections to protect unpaid claimants. Those protections usually include that the losing contractor pay the prevailing contractor’s attorneys fees, costs and interest on the amounts due. Contractors withholding undisputed sums all but ensures that the opposing contractor will be the “prevailing party” in the litigation, meaning that the contractor who refused to pay the undisputed balance will be paying for its lawyer, the other contractor’s lawyer, all costs associated with the litigation and the amount the court awards the prevailing party. Withholding undisputed sums will add to the cost of litigation because the other contractor’s lawyer will be forced to engage in discovery and motions related to that undisputed balance, and those fees could ultimately become the responsibility of the contractor who refused to pay the undisputed amount.
Reputational benefit in the community
Paying undisputed amounts in a timely manner can also positively a contractor’s reputation in the community. Lowered-tiered suppliers and subcontractors are less likely to work with a contractor known for failing to pay on time.
Can help the project stay on time
If the payment dispute occurs during the project, paying the undisputed sums immediately can help the project stay on time. Helping the project stay on time can avoid other undesirable consequences that could result from non-payment (the lowered tiered contractor could walk off the job, that contractor’s subcontractors or suppliers could also walk off, the owner could assess liquidated damages if the project is not completed on time, etc).
