Know Your Rights: Prompt Payment Act and Termination Remedies

By William Coats.

We frequently receive calls from contractors and subcontractors who, for a variety of reasons, are not being paid by an owner/general contractor and for whom bond and lien remedies are not available. They want to know how they can get paid. In some instances, the contractor or subcontractor has been terminated or has walked off of the job and wants to know what materials, equipment and supplies can be removed from the site. Consider the following when dealing with these issues.

The Prompt Payment Act

The Texas Property Code Section 28.001 ("Private Work Prompt Payment Act") deals with payment to contractors and subcontractors for "properly performed work and suitably stored materials" on private work projects. The terms of the act require the owner to tender payment to the general contractor 35 days from the date of the submission of an invoice "[f]or an amount that is allowed under the contract for properly performed work." The general contractor, in turn, must pay the subcontractors for the portion of the owner's payment that is attributable to work properly performed no later than 7 days after the contractor receives payment by the owner. If the parties are embroiled in a "good faith" dispute regarding a portion of the work, the party withholding payment can withhold no more than 100 percent of the difference between the amount it believes is due and the amount the invoicing party claims is due. Interest accrues at the rate of 1.5 percent per month or 18 percent annually on overdue payments. The terms of the act cannot be waived or altered by contract and attempts to do so are void.

Work suspension is also an available option under the terms of the Private Work Prompt Payment Act. However, we suggest that work stoppage or suspension only be employed as a last resort. This is a risky strategy; if the reason for nonpayment is failure to perform in compliance with the contract, the contractor or subcontractor may expose themselves to claims for corrective work, completion costs, damages for delay and a host of other damages and penalties.

The Public Works Prompt Pay Act, which is found in Texas Government Code section 2251.001, has very similar terms to the private work act. On public projects the owner must tender payment 31 days after receiving the invoice and the contractor must pay the subcontractor no later than 10 days after the contractor receives payment. Interest accrues at 1 percent per month. As with the private work act, payments for the disputed work can be withheld.

One of the aims of these statutes is to penalize heavy-handed owners and contractors who hold ransom undisputed amounts as a means of gaining an advantage in the dispute over the remaining amounts. This is accomplished through interest penalties.

Removing Equipment and Materials Post-Termination

When a contractor or subcontractor quits or is fired, one of the issues is who owns the materials and equipment that the contractor or subcontractor delivered to the jobsite.

• Transfer of Title-- Although this is a generalization, title typically passes upon delivery. Review the contract documents for provisions that discuss transfer of title or even assignment by the contractor or subcontractor of the equipment, materials and tools. If title has transferred and/or an assignment provision exists, the materials and equipment stay at the jobsite.
• Conversion-- Both parties need to be aware of the contract terms and transfer of title of the materials and equipment or they may face a claim of conversion. If equipment or materials are being wrongfully withheld, a demand needs to be made for the return of the items that is fairly specific and accurately describes the items sought. A temporary restraining order or injunction are methods to consider using to recover the items if the value of the items justifies the cost to do so.
• Trespass-- If the termination has been particularly acrimonious and the contractor or subcontractor has been ordered to stay off of the jobsite, the parties will need to make arrangements to permit the return of equipment or materials (if any) which the subcontractor and/or contractor is entitled to remove. Returning to the property to recover equipment without permission may subject the terminated contractor to a charge of trespass. One court held that a contractor's abandonment of a large pipe that did not conform to the project specifications and was not useable constituted a trespass and the contractor was liable for the costs to remove the pipe.