Saturday, November 19, 2016
Many states protect construction contractors and subcontractors with prompt payment statutes: If a payment isn’t received within 30 days after the due date, the contractor is entitled to interest at 1% a month plus attorney fees. Retainage can’t exceed some percentage, usually 5% or 10%. Subcontractors must be paid within seven days after the prime contractor is paid. A contractor who isn’t paid on time has the right to stop work.
Not all states have these prompt payment statutes and the law is different in every state. For example, Michigan and New Hampshire don’t have prompt payment statutes. In many states, terms in the contract control if inconsistent with the prompt payment act. In other states, anything in a contract that doesn’t comply with the act is void. Payment deadlines for public works construction are usually different from what’s required on private jobs. In some states, the rules for payment on residential jobs are different from the rules on commercial jobs. Other states specify when invoices should be submitted for payment and set time limits for objecting to any charge on an invoice.
Prompt payment statutes give contractors and subcontractors extra leverage when an owner doesn’t pay on time. Construction Contract Writer can help you make good use of the leverage offered by your state – whether the job is commercial or residential, public or private. The trial version is free.
A Louisiana case decided last week (2016 La. App. LEXIS 2129) underscores my point about leverage.
Entergy Corporation, the big mid-south utility, needed repairs at their Perdido Street Gas Department warehouse in New Orleans. Gee Cee Group, a Louisiana commercial construction company, won the job as general contractor. Gee Cee selected Boes Iron Works to do the structural steel and iron work. Their contract had a "pay-when-paid" provision. Subcontractor Boes was to be paid when Entergy paid general contractor Gee Cee.
Boes finished their work and submitted invoices totaling $33,320. That was December 27, 2001. Gee Cee was paid in full by Entergy over a year later. But Gee Cee didn’t notify Boes of the payment and didn’t pay the $33,320 owed Boes. Nearly eight years later, Boes still had not been paid. In response to a demand, Gee Cee started making payments. In June 2010 they paid $5,000. Three months later they paid another $11,500. That left $16,820 still unpaid. Obviously, Boes needed some extra leverage.
Louisiana has a perfectly good prompt payment statute. Subcontractors on both public and private jobs should be paid within 14 days after payment is received from the owner. If payment is not received within 14 days, an interest penalty of 1/2 of 1% per day (up to 15%) accrues plus the applicable interest rate in the contract. In addition, the subcontractor is entitled to attorney's fees if payment was withheld without reasonable cause. Additional penalties can be assessed for misapplication of payments due laborers or subcontractors.
Armed with that leverage, Boes faxed an invoice to Gee Cee for $82,739.80. That included the $16,820.00 still due plus interest for the last eight years. The fax didn’t elicit any more payments. In February, 2013, Boes filed suit.
At trial, Gee Cee had no complaint about the work Boes had done. But Gee Cee had other excuses: The statute of limitations (called peremptory exception of prescription in Louisiana) had run on this old debt. The Gee Cee Group had been succeeded by the present company, Gee Cee LA. The new company wasn’t liable for the old company’s debts.
The trial court didn't agree. Boes was awarded the $16,820.00 still owed plus penalties of $4,998.00, plus $8,000.00 in attorneys' fees plus $5,161.81 in costs plus interest as provided by Louisiana law. Both Boes and Gee Cee appealed and the award was modified by the appellate court. Still, Boes made good use of Louisiana’s prompt payment statute. I recommend doing the same if your state has a prompt payment statute. But don’t wait eight years to do it.