Prompt payment laws continue to disrupt the construction industry, eliminating past practices by requiring timely payments for contractors, subcontractors, and suppliers. Prompt payment laws vary across states, with each jurisdiction establishing its own framework to ensure timely compensation in the construction industry. However, there has been a discernible shift in recent years as state legislatures actively revise these laws to provide stronger protections for claimants. This shift reflects a growing desire to protect the rights and interests of construction participants. This article explores this trend, highlighting specific legislative and judicial examples from various states in the last few years, and examines a recent Massachusetts case outlining the requirements for rejecting payment applications in good faith to avoid their deemed acceptance.
Continuation of a Multi-State Trend, Not a New Trend
California's prompt payment laws are designed to ensure that contractors, subcontractors, and suppliers involved in construction projects are paid promptly and fairly for their services and materials. California law mandates that owners and contractors must make progress payments to contractors and subcontractors within specific timeframes. Non-compliance with California's prompt payment laws can result in significant penalties, including the payment of interest penalties on overdue amounts and attorney’s fees. Repeated violations can also lead to the suspension or revocation of a contractor's license. In the case of a dispute, the owner or contractor may withhold 150% of the disputed amount. However, until 2018, the issue of whether funds could be withheld based on any dispute or a specific dispute regarding the payment itself was uncertain. Often the upstream party used the 150% threshold liberally to withhold funds from claimants, especially retainage.
In 2018, after a split of authority between two districts of the California Court of Appeal, the California Supreme Court took up the question in United Riggers & Erectors, Inc. v. Coast Iron & Steel Co., 4 Cal. 5th 1082 (2018): may a contractor withhold retention payments when there is a good faith dispute of any kind between the contractor and a subcontractor, or only when the dispute relates to the retention itself? After a review of the history of California prompt payment statutes, the underlying purpose of the prompt payment laws, and discussion of inconsistency of the wording in the related but differently worded provisions in the relevant statutes, the California Supreme Court narrowly interpreted the good faith dispute provision and held that the “dispute” must relate to the specific payment due. As a result of the decision, upstream parties in California must be careful when withholding payments to lower-tier claimants and ensure withholding is directly related to a dispute tied to the withheld payment or face the sharp teeth of California’s prompt payment penalties.
In addition to courts clarifying and strengthening claimants’ rights to prompt payment, multiple state legislatures have enacted changes to their prompt payment laws. For example, in 2018, Pennsylvania made changes to its Contractor and Subcontractor Payment Act focused on the protection of downstream claimants. Some of the key changes included: (1) clarifying that the protections of the statute could not be waived by the parties: (2) authorizing contractors and subcontractors to suspend performance in the event of non-payment, following the provision of statutorily required notice; (3) specifying that the failure to provide timely notice—within 14 days of receiving an invoice—containing a good faith basis for withholding waives the payor’s right to withhold and requires payment in full; (4) requiring payment for undisputed items in an invoice, even if others are disputed; and (5) allowing a subcontractor (or contractor) to facilitate the early release of retention by posting a maintenance bond for 120 percent of the retainage held at substantial completion instead of waiting for payment after final acceptance of the work.
Similar changes were enacted to Tennessee’s Prompt Payment Act in 2020. The highlights of the changes included: (1) permitting parties not timely paid to send a notice to the payor and if the payor fails to respond in 10 days with “adequate legal reasons” for nonpayment, the unpaid party can seek injunctive relief; (2) specifying that failure to provide “adequate legal reasons” for nonpayment also entitles a claimant to stop work and receive an extension of the contract schedule; (3) mandating a default 18% per annum interest rate for late payment if the contract does not specify an interest rate; and (4) removing the requirement for notice to owners on commercial projects for lien rights to attach.