Archive for the ‘Payment Requirements’ Category

A Catch-22: Pay When Paid Clauses Do Not Extend the Lien Period

On June 17, 2010 Author By Scott Wolfe Jr

If you search “Pay When Paid Clauses” in Google, you’re going to get a lot of results that say a lot different things. This contractual provision – used in almost every general / sub construction contract – is perhaps one of the most confusing or misunderstood provisions out there.

We recently blogged about the dangers of using one contract in multiple states. The post used the “pay when paid” provision as an example of why multi-state contracts are problematic.

The provision itself seems pretty clear: one party will get paid when the other party gets paid. It isn’t. Interpretation of this provision varies by state, with some states striking down the provision entirely as against “public policy” and other states distinguishing between “pay when paid” provisions and “pay if paid” provisions. The only way to protect your company against this tricky provision is to consult with an attorney about how these provisions are treated in your jurisdiction.

While interpretation of “pay when paid” provisions differ from state-to-state, there does appear to be one constant about this provision across the country: It doesn’t extend your lien period.

Most states require liens be filed within a certain period after you last worked on the project, or after the project is complete. The fact that you or your company is waiting for payment because the prime or an upper-tiered sub hasn’t been paid is completely irrelevant. The lien period still starts when it starts, and ends when it ends.

As you might imagine, this presents a bit of a Catch-22.

On the one hand, you must file a lien to preserve your right to lien. On the other hand, filing a lien may complicate the payment problems for the prime or upper tier sub (and thus your payment problem), and may cause animosity when negotiations are otherwise calm.

Unfortunately, there is no easy fix for this complication. Each situation should be examined individually, and sometimes, a simple joint check agreement may be the solution. It’s just important to remember that good faith negotiations and waiting for payment under a contractual obligation to do so will not likely extend the lien period, and too much talk could result in the loss of lien rights.

Here are some great resources and articles on Pay When Paid provisions:

- Fourth Circuit Concludes Pay When Paid Clause is Unambiguous and Enforceable

- Pay When Paid or Pay If Paid Provisions

- Is Your Pay When Paid Clause Worthless?

- Contingent Payment Clauses, Use With Caution

This article was originally posted on Express Lien’s topic-specific Construction Lien Blog.

Posted in:     Construction Contracts, Filing Requirements, Payment Requirements  /  Tags: , , , ,   /   1 Comment

Great Resources for Mississippi Construction Law

On April 6, 2010 Author By Scott Wolfe Jr

This afternoon, I was reading a post on Bowie & Jenson’s Construction Law Forum blog about problems that may arise when using the same subcontract in more than one state. The case discussed in the blog post regarding the differences in interpretation of a pay when paid clause in Maryland and Virginia. While we don’t practice in either of those states, we very frequently encounter clients who are working across borders.

When it comes to Louisiana construction companies, they are frequently working in Mississippi.

Out of curiosity, I performed a little research on the treatment of pay when paid clauses in Mississippi to compare it with Louisiana’s treatment of the same. Immediately I went to my two favorite resources for Mississippi Construction Law, and figured our readers could benefit from these two resources and there’s no reason to keep them a secret. So here goes:

Robert Wise
While Robert doesn’t run a construction law blog, he has a bunch of great published articles available for download on his website. Take some of these as examples:

  • Mississippi Construction Lien, Bond, Stop Notice, Open Account & Contractor Prompt Payment Claims (pdf)
  • Mississippi Construction Bid Mistakes (pdf)
  • Mississippi Construction Supplier’s Collection Law Tool Kit (pdf)

Construction Law Toolbox Blog
The Construction Law Toolbox blog is published by Mississippi law firm Robinson, Biggs, Ingram, Solop & Farris, PLLC. The blog provides consistent quality posts about construction law issues that affect those performing construction work in Mississippi. Here are some example posts:

  • Do you have coverage under your commercial general liability policy for defective subcontractor construction? (link)
  • He who hesitates is lost – Protecting Payment Rights in Mississippi (link)
  • Can I Rely on my Subcontractor’s Certificate of Insurance? (link)

Oh, and the result of my pay when paid clause research, thanks to help from Mr. Wise is this:

In Louisiana, “pay when paid” requires payment within a reasonable time, regardless of whether payment was ever received from the property owner. “Pay if paid” clauses, on the other hand, makes payment from the owner an absolute condition precent to payment further down the contracting chain.

In Mississippi, it doesn’t seem to matter how it’s written: pay if paid, pay when paid, etc. The result is the same: payment is due within a reasonable time, regardless of whether payment was ever received from the property owner.

This article was originally posted on Wolfe Law Group’s topic-specific Louisiana Construction Law Blog.

Posted in:     Around The Web, Payment Requirements  /  Tags: , , , , ,   /   Leave a comment

Owners Cannot Hold Money From Contractor When Work Not In Dispute

On March 23, 2010 Author By Scott Wolfe Jr

It’s commonplace in the construction industry for a property owner to withhold final payment from the general contractor disputing the quality of completeness of construction work.   This happens between general and subcontractors as well.

All to often, however, the withholding party does this as a tactic, and in fact withholds much more than is actually in dispute.

A small decision out of the Louisiana Fourth Circuit this month addresses this circumstance.    There, the court ruled that the property owner must pay the contractor for the portion of work that is completed and not in dispute – despite the existence of disputes on the other portions of the work.

In Hi Construction & Demolition v. Louise Thomas, the Fourth Circuit held that where the property owner acknowledged the completion of certain work, the property  owner must tender payment to the contractor for that work.

A rather simple proposition, of course, but in a world where possession is 9/10ths of the law, it’s a principal often abused in the construction industry.   This case may be useful for contractors in a dispute where a payment is withheld not proportional to the amount actually in dispute.

This article was originally posted on Wolfe Law Group’s topic-specific Louisiana Construction Law Blog.

Posted in:     Louisiana, Payment Requirements  /  Tags: , , ,   /   Leave a comment

Time for Prompt Payment Acts in Washington & Louisiana?

On February 10, 2009 Author By Scott Wolfe Jr

This weekend, I read a post on the South Carolina Construction Law Blog about Texas’ Prompt Payment Act.  It caused me to do a little online research on similar acts around the country, finding them in Alabama, Tennessee, Georgia, Wisconsin, New York, federally, and elsewhere.  

A "Construction News" pamphlet from Baker Donelson [pdf] in the Winter of 2004 has a good article about the statutes in AL, TN & GA, the theme of each act simply being this:  "Prompt Payment Acts Set Payment Guidelines for Construction Work."

It’s no secret that payment problems are rampant in the construction industry.  And unfortunately, the old statement that "possession is 90% of the law" has some truth to it. 

Large well-funded construction companies can hold progress payments at the end of a project for trivial reasons, and strong-arm its subcontractors into settling for less.  Prompt Payment Acts aim to equalize the playing field a bit, applying penalties against those who misapply funds or try to strong-arm subs and suppliers.

So, do they exist in Louisiana and Washington?   Mostly….no.  

Both Louisiana and Washington lack a pure "Prompt Payment Acts."  Those victim to the misapplication of funds must rely on jurisprudence or other possibly applicable statutes, discussed below. 

Misapplying Funds in Louisiana
Buried within the Private Works Act in Louisiana is La. R.S. 9:4814 (A), which provides as follows with regard to the misapplication of funds:

No contractor, subcontractor, or agent of a contractor or subcontractor, who has received money on account of a contract for the construction, erection, or repair of a building, structure, or other improvement, including contracts and mortgages for interim financing, shall knowingly fail to apply the money received as necessary to settle claims to sellers of movables or laborers due for the construction or under the contract. Any seller of movables or laborer whose claims have not been settled may file an action for the amount due, including reasonable attorney fees and court costs, and for civil penalties as provided in this Section.

This provision actually works as a "prompt payment" requirement, but as is evidence from its terms it only has limited applicability. 

First, the contractor must "knowingly" misapply the funds.  Second, the only parties qualified to recover the penalties of the provision are "sellers of movables" and "laborers." 

The Private Works Act in Louisiana specifically distinguishes between laborers and subcontractors, and so subcontractors who provide labor to the project would not likely qualify for the penalties under La. R.S. 9:4814 – although the matter has never been decided.

Unfortunately for everyone not mentioned by §9:4814, Louisiana doesn’t provide a remedy when funds are misapplied, and the parties must rely exclusively on the conditions of its contract.

Misapplying Funds in Washington
In 2006, the Washington Court of Appeals published an interesting reversal in Westview Investments, Ltd. v. U.S. Bank National Association [pdf of decision], addressing the issue of misapplying construction funds in Washington.

Since progress payments are not funds held in "trust" by statute in Washington, the court explained that they may be considered trusts if appointed as such by the parties – namely, through contract.

According to the Westview decision, progress payments made by a project owner to a general contractor constitute "trust funds" for the benefit of subcontractors, when the agreement between owner and contractor is based on AIA A201 (1997).    

Interfering with any "trust funds" would be a tortious conversion – and the Westfield court even goes so far as to rule that banks may be liable for misappropriating trust funds when it uses these funds to  pay down the borrower’s debt to the bank (see discussion here).

Time for A Prompt Payment Act?
Is it time for a Prompt Payment Act in these Washington and Louisiana?  

While many statutes and regulations have drawbacks, there doesn’t seem to be a downside to requiring contractors to pay its bills!

Litigation is costly and time-consuming – and it doesn’t seem fair that after a long, expensive battle with a better-funded opponent, subcontractors and suppliers must settle for the principal debt. 

There are ways to punish contractors in Louisiana and Washington when funds are misapplied, but it’s always dependant on circumstance.  A Prompt Payment Act would help equalize the playing field for subcontractors and suppliers who rely heavily on prompt payments.

Posted in:     Payment Requirements  /  Tags: , , , , , , , , , , ,   /   3 Comments

Time for Prompt Payment Acts in Washington & Louisiana?

On February 10, 2009 Author By Scott Wolfe Jr

This weekend, I read a post on the South Carolina Construction Law Blog about Texas’ Prompt Payment Act.  It caused me to do a little online research on similar acts around the country, finding them in Alabama, Tennessee, Georgia, Wisconsin, New York, federally, and elsewhere.

A “Construction News” pamphlet from Baker Donelson [pdf] in the Winter of 2004 has a good article about the statutes in AL, TN & GA, the theme of each act simply being this:  “Prompt Payment Acts Set Payment Guidelines for Construction Work.”

It’s no secret that payment problems are rampant in the construction industry.  And unfortunately, the old statement that “possession is 90% of the law” has some truth to it.

Large well-funded construction companies can hold progress payments at the end of a project for trivial reasons, and strong-arm its subcontractors into settling for less.  Prompt Payment Acts aim to equalize the playing field a bit, applying penalties against those who misapply funds or try to strong-arm subs and suppliers.

So, do they exist in Louisiana and Washington?   Mostly….no.

Both Louisiana and Washington lack a pure “Prompt Payment Acts.”  Those victim to the misapplication of funds must rely on jurisprudence or other possibly applicable statutes, discussed below.

Misapplying Funds in Louisiana
Buried within the Private Works Act in Louisiana is La. R.S. 9:4814 (A), which provides as follows with regard to the misapplication of funds:

No contractor, subcontractor, or agent of a contractor or subcontractor, who has received money on account of a contract for the construction, erection, or repair of a building, structure, or other improvement, including contracts and mortgages for interim financing, shall knowingly fail to apply the money received as necessary to settle claims to sellers of movables or laborers due for the construction or under the contract. Any seller of movables or laborer whose claims have not been settled may file an action for the amount due, including reasonable attorney fees and court costs, and for civil penalties as provided in this Section.

This provision actually works as a “prompt payment” requirement, but as is evidence from its terms it only has limited applicability.

First, the contractor must “knowingly” misapply the funds.  Second, the only parties qualified to recover the penalties of the provision are “sellers of movables” and ”laborers.”

The Private Works Act in Louisiana specifically distinguishes between laborers and subcontractors, and so subcontractors who provide labor to the project would not likely qualify for the penalties under La. R.S. 9:4814 – although the matter has never been decided.

Unfortunately for everyone not mentioned by §9:4814, Louisiana doesn’t provide a remedy when funds are misapplied, and the parties must rely exclusively on the conditions of its contract.

Misapplying Funds in Washington
In 2006, the Washington Court of Appeals published an interesting reversal in Westview Investments, Ltd. v. U.S. Bank National Association [pdf of decision], addressing the issue of misapplying construction funds in Washington.

Since progress payments are not funds held in “trust” by statute in Washington, the court explained that they may be considered trusts if appointed as such by the parties – namely, through contract.

According to the Westview decision, progress payments made by a project owner to a general contractor constitute “trust funds” for the benefit of subcontractors, when the agreement between owner and contractor is based on AIA A201 (1997).

Interfering with any “trust funds” would be a tortious conversion – and the Westfield court even goes so far as to rule that banks may be liable for misappropriating trust funds when it uses these funds to  pay down the borrower’s debt to the bank (see discussion here).

Time for A Prompt Payment Act?
Is it time for a Prompt Payment Act in these Washington and Louisiana?

While many statutes and regulations have drawbacks, there doesn’t seem to be a downside to requiring contractors to pay its bills!

Litigation is costly and time-consuming – and it doesn’t seem fair that after a long, expensive battle with a better-funded opponent, subcontractors and suppliers must settle for the principal debt.

There are ways to punish contractors in Louisiana and Washington when funds are misapplied, but it’s always dependant on circumstance.  A Prompt Payment Act would help equalize the playing field for subcontractors and suppliers who rely heavily on prompt payments.

Posted in:     Around The Web, Louisiana, Payment Requirements, Washington  /  Tags: , , ,   /   3 Comments
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