Payment Due

July 6, 2022

By: Jon Straw

Under so-called “prompt payment” laws, when is payment due for work that was timely and properly performed if the payor alleges the payee delayed the same public project?

This question was addressed in a case involving the Tennessee DOT (TDOT). In 2019, the prime contracted with TDOT to provide emergency slope stabilization on US-70 in Cumberland County, Tenn.. The original schedule for completion provided 112 days from issuance of the notice to proceed. Thereafter, liquidated damages of $1,000 per day could be assessed. Before notice to proceed was issued, the sub offered to perform the design-build work for the retaining walls as part of the prime’s stabilization project. By the time the subcontract was signed, the originally planned completion date was less than two months away. The subcontract incorporated by reference all terms and conditions of the prime contract. The project was not substantially completed until over a year after the original completion date.

Although not directly related to prompt payment laws, primes and subs should be cautious when (sub)contract negotiations lag. If there is no agreement until signatures are exchanged, the passage of time may change the parties’ perspectives and/or positions. Before signing, determine if anything significant has changed since negotiations began.

Upon substantial completion of the TDOT Project, the prime withheld retainage in an amount greater than 5%. The prime explained the withholding by arguing that the sub delayed other work for the same project and sought damages from the sub for: extended overhead, idle equipment, increased traffic control equipment costs, and flow-down of the liquidated damages assessed by TDOT.

The sub argued that payment of all retention was due under the Tennessee Prompt Payment Act when the sub sought payment for work that was properly and timely performed. The prime argued the subcontract provisions controlled when payment was due and allowed withholding for all alleged damages and delays allegedly caused by the sub, even if the withholding exceeded the 5% maximum.

Before revealing the result, an outline on prompt payment statutes might help. Forty-Nine states have enacted statutes to encourage prompt payments by public owners to prime contractors. Of those 49 states, all but six have prompt payment statutes protecting subcontractors and all but 11 states have such laws protecting lower tiers. Like Federal and State “Little” Miller Acts, lower tiers in the contractual chain receive a lesser degree of protection. It is not that there is no protection for lower tiers, but there are more conditions to receive protection. For whatever reason(s), New Hampshire is the only state without any statutes encouraging or protecting prompt payments on public or private projects.

Prompt payment statutes prescribe when payment must be made, after which interest accrues (2% a month in California, but 10% a year is common). Generally, payment is not due until the “work” for which payment is sought is complete. A question for another day is whether payment is due before the “work” is accepted or satisfactorily completed? Often, partial payment does not mean acceptance (like a prime’s or owner’s receipt or review of subs’ daily reports does not usually mean agreement with the content of such reports nor that the work described therein was satisfactorily performed). Final payment, though, is typically conditioned upon acceptance. Now, to the result in Tennessee.

The court held that payment of the 5% retainage was subject to final project completion. The court also held that any withholding above the 5% maximum for retention was subject to the terms of the subcontract, including the allegations that the sub delayed the project. Twin K Construction, Inc. v. UMA, Geotechnical Construction, Inc., U.S. District Court of Tennessee (Northern Division), March 23, 2022.

Like most states, Tennessee’s prompt payment deadline is subject to the terms of the parties’ written agreement. A minority of states require prompt payment of work performed subject only to completion of the work for which payment is sought, regardless of whether the work was timely performed or the terms of the parties’ agreement – this continues the cash flow to lower tiers while the higher tiers shoulder the burden of proving and recovering damages for defective work and/or delays.

Contractors should monitor the passage of time when requesting and processing payments. Prompt pursuit of payment is prudent. Particularized justification for amount(s) withheld is paramount. 

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