United States: Trends In Prompt Payment Acts Governing Private Construction Contracts

Last Updated: March 20 2013
Article by Necia Hobbes

Prompt Payment Acts ("PPAs"), which the federal government and many states have enacted, generally provide legal recourse against owners or contractors who fail to meet payment obligations required by construction contracts. The number of PPAs governing private construction contracts is on the rise, and in the past year several amendments to such PPAs went into effect in Delaware, Oregon, and California. Additionally, new legislation was introduced in Nebraska and Colorado in January. This area of the law is in flux, and case law is sparse due to the recent enactment and amendment of many of these private PPAs. However, a number of important trends are developing across the United States. This Commentary addresses the rise of private PPAs, how PPA statutes work, and notable trends in drafting and executing construction contracts.

The rise of private PPAs

The first PPAs governed contracts with public entities. More than 30 years ago, Congress drafted legislation mandating prompt payment in contracts with the federal government. Known as the Prompt Payment Act of 1982, Pub. L. No. 97-177, 31 U.S.C. §§ 3901 et seq., the law entitles contractors to recover interest at a set rate if, upon proper notice, the federal government fails to make timely payment.1 It also requires contractors to make prompt payment to subcontractors.2 In 1988, the law was amended to include specific provisions relating to construction contracts.3 These provisions set out time limits, interest rates, and other restrictions on construction contracts and payment, including the mandate that contractors must pay interest on any amount that they have been paid but have failed to earn due to deficient performance.4

Following the passage of the federal PPA, many states began to follow suit with their own versions of PPAs.5 PPAs governing public contracts were enacted quickly and have been in place in 49 of the 50 states for well over a decade. However, PPAs governing private contracts are continuing to gain steam. Today, two-thirds of the states have enacted a PPA governing private contracts, and states are continuing to revise and develop the statutes they have recently enacted.

The American Subcontractors Association ("ASA") has been especially active in lobbying states for the passage of PPAs, based on concerns that subcontractors are not privy to negotiations between the owner and prime contractor, that they might bear the risk of owner nonpayment, and that subcontractors often have to wait a lengthy period of time before suspending work based on nonpayment.6 The ASA's efforts convinced several states to legislate or to judicially recognize that contractual clauses shifting the burden of nonpayment to subcontractors are void as a matter of public policy.7 Other states included limitations on such clauses within their PPAs, or have otherwise employed PPAs to address some of these concerns.

How private PPA statutes work

Private PPA statutes are anything but uniform, but they share some common components, which generally set forth penalties for late payments in certain contractual situations. Every PPA statute is unique in its requirements and applicability, so in any given contract scenario, potentially applicable PPA statutes should be closely scrutinized.

At its outset, a PPA statute generally defines the parties and situations to which it applies. Private PPA statutes usually apply to contracts for the improvement of land (including everything from demolition to construction), and PPA purpose statements tend to reflect the states' interest in the economic stability and viability of the construction industry. Generally, PPA statutes identify the contractual situations in which they apply, such as to disputes between the owner and contractor or, more frequently, to disputes between contractor and subcontractor.

There are also requirements for invoicing, payment deadlines, and interest rates on overdue payments. PPAs usually include standards or events to trigger the date upon which the invoicing party is entitled to payment. From that date, PPAs impose a deadline—usually an exact number of days—for payment. The contracting entity may get a certain period of time to respond to any payment requests, but otherwise, if payment is not made by the statutory deadline, the contracting entity must pay the contractor or subcontractor overdue payments plus a statutory rate of interest.

Additionally, PPAs often include provisions that limit certain industry procedures and practices. Most commonly, PPAs place parameters on parties' actions, from invoicing and notice procedures to retainage practices. Many PPAs also limit parties' ability to override PPA provisions by contract.

Finally, PPAs almost always set an interest rate that will be applied to overdue payments. Private PPAs often treat the statutory interest rate as a default and allow parties to contractually agree to another (usually lower) rate. A few states also impose additional penalties. For example, Oregon's PPA provides for civil penalties or sanctions, or even termination of a contractor's license for repeat offenses.8

Notable private PPA trends

Applicability to design professionals and others. Most PPAs were initially targeted primarily at building contracts, but it is increasingly common for PPAs to apply to other related contracts and services. Some statutes broadly include contracts for professional or skilled services, and others specifically include architectural, engineering, financial, design, or even medical services that are related to construction or land improvement contracts. Delaware became the most recent state to adopt this broad application. Previously, its PPA applied to contracts "to furnish labor or materials" in connection with construction or land improvement projects,9 but after a 2012 amendment, Delaware's PPA also applies to contracts to furnish related services, and it includes in its definition contracts with "architects, engineers, surveyors, construction managers, and all persons providing ... services in connection with" such projects.10 Interestingly, private PPAs have generally adopted broader definitions of covered services or contracts than public PPAs.

Exclusion of small, residential projects. Some private PPAs cover any and all construction-related private contracts, but more commonly, PPAs exclude smaller contracts from coverage. The extent of exclusions are varied. The most common exclusion is for single-family residential units or projects involving a limited number of residential units. Some states exclude projects on owner-occupied property, and at the other end of the spectrum, some states exclude projects by residential homebuilders. PPAs also commonly exclude certain projects below a specified dollar amount, ranging from projects valued at under $1,000 where no building permit is necessary (Hawaii) to projects valued at under $3 million (Massachusetts).11 Some PPAs make exceptions for certain situations, such as a lender's failure to properly disburse funds. Additionally, there are a few industry- and region-specific exclusions, such as contracts for oil and mineral production and development (Texas), or contracts related to land improvement in lower Manhattan necessitated by the 9/11 terrorist attacks (New York).12

Prohibition of certain common construction contract provisions. Private PPAs often make certain contractual provisions void and unenforceable. Some state that a contract cannot override parties' rights under the PPA, and others refer to specific provisions that are unwaivable. For example, Colorado's proposed legislation declares that "any provision in a construction agreement that sets payment terms in violation of this article is unenforceable and void as against public policy."13 The three most commonly prohibited clauses are "no damage for delay" clauses, "pay if paid" clauses, and choice of law or venue clauses.

"No Damage for Delay" Clauses. "No damage for delay" clauses are often included in construction contracts to ensure that the owner will not have to pay damages to the contractor (nor the contractor to the subcontractor) if work is delayed for certain reasons. These clauses are generally permitted, although a few PPAs prohibit such clauses outright, and a few others allow such clauses on a limited basis. For example, such a clause might be permitted only to the extent that the cause of the delay is an act of God or is otherwise outside the control of the contracting entity, or to the extent that the contractor hired by the contracting entity is responsible for causing the delay. Some PPAs also require parties to notify each other of any foreseeable delays.

"Pay if Paid" Clauses. A few PPAs prohibit "pay if paid" clauses, which contractors often include in contracts to ensure that if they are not paid by an owner for work on a project, they will not be required to pay subcontractors out of their own pockets. Even in the absence of a statutory prohibition, some courts have found "pay if paid" clauses to be void as a matter of public policy. Prohibitions on such clauses effectively place the entire risk of owner nonpayment on the shoulders of the contractor, requiring contractors to foot the bill for the owner's construction project unless and until the owner pays.

Choice of Law or Venue Clauses. It is increasingly common for PPAs to state that in contracts for the improvement of land, choice of law or choice of venue provisions in favor of other states' laws or venues are unenforceable or void. Delaware was one of the latest states to include such a prohibition, using sweeping language to declare that no dispute governed by the PPA may be resolved in or under the laws of another state.14 Notably, however, the Federal Arbitration Act likely preempts laws prohibiting parties from arbitrating in another state.15

Suspending performance and withholding payment. PPAs tend to be more permissive in allowing a contractor or subcontractor to suspend performance than in allowing an owner or contractor to withhold payment. Most PPAs allow parties to suspend performance if they are not promptly paid. However, many PPAs require that parties meet certain notice requirements before suspending performance, and a few also require that the payment must be undisputed.

In contrast, many PPAs set forth specific grounds upon which the withholding of payment will be justified. Sometimes these provisions are expansive, giving the owner or contractor broad justification for withholding funds in a variety of circumstances, but often the provisions are rather restrictive, appearing to limit the circumstances under which an owner or contractor might otherwise arguably withhold payment. Permissible grounds for withholding payment enumerated in some PPAs include: unsatisfactory performance, failure to comply with the terms of the contract, defective construction or damage, evidence that construction will not be timely or fully completed, the filing of third-party claims, or the failure of the contractor or subcontractor to timely pay his or her obligations to lower-tier contractors. PPA provisions regarding the withholding of payment generally include notice requirements, and they may also require that the payment must be withheld in good faith or that the dispute must be bona fide. Some statutes also impose a limit on the amount that may be withheld, such as an amount not exceeding a certain percentage of the disputed amount.

Extra protections for subcontractors. In general, PPAs tend to be especially protective of subcontractors and lower-tier contractors. Some states' private PPAs apply only to contracts between contractors and subcontractors, and not to contracts between owners and contractors. To the extent that the latter type of contract is covered, PPAs sometimes require that owners may or must withhold payment to contractors until contractors have made timely payments to subcontractors. Additionally, PPAs often mandate short deadlines for payment or restrict contractors' ability to retain funds or alter PPA provisions by contract. In contrast, provisions for payment to prime contractors tend to provide default deadlines and other provisions, which a contract may override. Finally, some PPAs set forth limitations that are unwaivable, such as those discussed above, in order to provide extra protection for subcontractors. These distinctions based on type of relationship are likely a result of perceived differences in resources and bargaining power, and they may be due to the role of the ASA in lobbying for the passage of PPAs.

Awards of attorneys' fees and costs. Many states allow for recovery of attorneys' fees or costs. Some PPAs that provide for attorneys' fees might not allow parties to override or amend the provisions by contract. However, where PPAs lack an express provision addressing attorneys' fees, or fail to define related terms, courts are often willing to enforce contractual fee- and cost-shifting provisions.

Fee and cost-shifting provisions under the PPA each set forth a standard that must be met in order for a party to obtain attorneys' fees and costs. Some standards are set very high, requiring the court to make a finding of bad faith. At the other end of the spectrum, it is common to find provisions awarding attorneys' fees to the successful or prevailing party: Iowa merely requires a party to show that it has "established a claim."16 Other PPAs require something in between. For example, Maine requires that a party must substantially prevail and prohibits contractual provisions to the contrary.17 Interestingly, the standards applicable to public contracts are often higher than those applicable to private contracts.

Many jurisdictions have yet to develop case law regarding the interpretation and application of these standards in the PPA context. However, a Louisiana appeals court found that a contracting entity's unjust refusal to pay funds clearly owed constituted bad faith under the applicable PPA.18 The standards have often proven to be somewhat malleable in the hands of the courts. For instance, the Vermont Supreme Court recently ruled that a contracting entity "substantially prevailed" in defending against a contractor's claims, despite the fact that the contractor was the "net victor to the tune of [a few hundred dollars]."19 In another PPA case, a Texas appeals court ruled that a party that did not prevail on all claims could still potentially recover fees on its PPA claim if it properly segregated its recoverable fees attributable to the claims upon which it prevailed.20

Whether an award of fees and costs is available may also depend upon the basis for the claim or upon where the dispute is heard. For example, Oregon recently limited fee and cost awards to the prevailing party in actions to collect interest.21 PPAs may also limit awards to a dispute determined by a court (rather than arbitrators), or vice versa.

Finally, even if the standard is met, fee and cost provisions are not always mandatory. Many provisions—including one in Nebraska's proposed legislation22—automatically entitle a party to recover reasonable fees and costs, but others are permissible, allowing the court to determine whether to make such an award.

Greater freedom of contract than public PPAs Despite the many requirements in today's private PPAs, private PPAs are more likely to allow parties to override certain contractual provisions by agreement, unlike public PPAs, which tend to set rigid provisions that may not be altered by contract. A few states allow private contracts to override all or almost all provisions of the PPA. However, provisions that are most frequently subject to override in private contracts include: requirements on invoicing, notice, deadlines, retainage, grounds for withholding payment, and substantial performance. Thus, in many states, these provisions serve as default gap-filler provisions rather than mandates.

Conclusion

Now that most states have enacted private PPAs, owners, contractors, subcontractors, and design professionals should be aware of PPAs' effect on the contractual relationship and payment obligations on construction projects. Each state varies, but some of the more common provisions in construction contracts could be void as a matter of public policy or overridden by a private PPA. Furthermore, private PPAs may provide additional remedies to contractors or subcontractors that increase the financial risk to owners or contractors. Experienced, creative, and practical counsel can assist owners, contractors, subcontractors, or design professionals in evaluating and mitigating their contractual risk on construction projects in any state in light of the increase of private PPAs.

Footnotes

1. See David W. Burgett & Edward C. Eich, "Contrasting CBCA and COFC Decisions Illustrate What 'Disputes' Will Toll the Accrual of Prompt Payment Act Interest," Bloomberg L. Fed. Contracts Rep. , May 2009.

2. 31 U.S.C. § 3903.

3. See id. § 3905.

4. John W. Hays, "Prompt Payment Acts: Recent Developments and Trends," 22 Constr. Law. 29, 29 (2002).

5. Frank Hughes & Debera Massahos, "Statutes Permitting Recovery of Attorney's Fees in Construction Cases," 17 Constr. Law. 33 (1997).

6. Edward H. Tricker, Kory D. George, and Erin L. Gerdes, "Survey of Prompt Pay Statutes," 3(1) J. Am. C. Constr. L. 5 (Winter 2009).

7. Richard A. Lord, 8 Williston on Contracts § 19:59, nn. 1-7 and accompanying text (4th ed.).

8. Or. Rev. Stat. § 701.992.

9. Del. Code Ann. tit. 6, § 3501 (2011).

10. 78 Del. Laws 269, § 1 (2012) (amending Del. Code Ann. tit. 6, § 3501, et seq.).

11. Haw. Rev. Stat. § 444-2; Mass. Gen. Laws ch. 149, § 29E.

12. Tex. Prop. Code Ann. § 28.010; N.Y. Gen. Bus. Law § 756-e.

13. H.B. 13-1090, 69th Leg., 1st Sess., at § 8-10.5-110 (Colo. 2013)

14. 78 Del. Laws 269, § 1 (amending Del. Code Ann. tit. 6, § 3503).

15. See Robert A. Prentice et al., Pennsylvania Construction Law: Getting Started, Getting Covered, Getting Paid 136 (2010).

16. Iowa Code § 573.21.

17. Me. Rev. Stat. Ann. tit. 10, § 1118(4).

18. M. Matt Durand, L.L.C. v. Denton-James, L.L.C, No. 2011 CA 0784, 2012 WL 762303, *5 (La. Ct. App. Mar. 8, 2012).

19. Burton v. Jeremiah Beach Parker Restoration & Constr. Mgmt. Corp., 6 A.3d 38, 42 (Vt. 2010).

20. AMX Enters. v. Master Realty Corp., 283 S.W.3d 506, 521 (Tex. Ct. App. 2009).

21. 2011 Or. Laws 553, § 1 (amending Or. Rev. Stat. §§ 701.620 – 701.645; effective Jan. 1, 2012 as per Or. Rev. Stat. §171.022).

22. L.B. 373, 103rd Leg., 1st Sess. (Neb. 2013).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions