This is part two of a two-part series. Part one appeared in the January edition of HighProfile.
David Wilson
Disputes – Disputes over rejected payment applications or change order requests are inevitable, but many contracts require resolution of disputes to await completion of the project. Consistent with the improvement to the flow of funds, the Prompt Pay Act directs that rejection of a payment application or a change order request is subject to the applicable dispute resolution procedure, and any provision that requires a party to delay use of that procedure for more than 60 days is void and unenforceable.
Pay if Paid – Contract provisions that condition any obligation to pay upon receipt of payment from a third party (“pay if paid”) can shift the risk of non-payment to those with no connection to the reason for non-payment and least able to bear that risk. The Prompt Payment Act declares “pay if paid” provisions void and unenforceable, with two exceptions, which must be clearly stated in the contract. The party seeking to enforce pay-if-paid bears the burden of proof as to each element, and if neither exception applies, it must pay regardless of whether it receives its own payment.
The first exception applies where non-payment from the third party is due to failure in performance by the party seeking payment. The party seeking to enforce pay-if-paid must have provided written notice of the failure, and the party seeking payment must have failed to cure within the contractual cure period, or if there is none, within 14 days after receipt of written notice.
The second exception applies where the third party fails to pay because it is insolvent or becomes insolvent within 90 days after submission of the application for payment. But, the party seeking to enforce the payment condition must have taken specific measures to obtain security and minimize the risk of non-payment. Those measures are filing documents to obtain a mechanic’s lien before its first application for payment for on-site work, maintaining, perfecting and foreclosing on the lien, and pursuing all reasonable legal remedies to obtain payment until there’s a reasonable likelihood further action will not result in payment. The party seeking payment may question the legal remedies taken, and if not satisfied, may file a proceeding in court for a quick judicial determination.
Suspension of Work- Unpaid contractors and subcontractors may no longer be forced to continue work because of contract provisions prohibiting suspension for any reason, or requiring long notice and cure periods for non-payment. Now, any contract provision requiring a person to continue working if payment of an approved amount is not received within 30 days of when it’s due, is void and unenforceable. There are two exceptions. The first exception is when non-payment is due to a dispute over the quality or quantity of work, typically where defects or errors in measurement appear after payment approval for apparently correct work or quantities. The second exception is when non-payment is due to a default occurring after approval of the payment, typically where the party seeking payment has defaulted in some other way, such as abandonment of the project, causing damages that fairly should be offset against the pending payment. For either exception to apply, the party seeking to prevent suspension must have given prior notice of the dispute or default, and paid all undisputed amounts due.
Unenforceable Provisions – Prompt Pay is the law. And to make sure of that, the Act also provides that any contract provision which purports to waive or limit the terms of the law is void and unenforceable.
David E. Wilson, Esquire is a partner at the construction law firm of Corwin & Corwin LLP, and drafted the bill that became the Prompt Pay Act.
