January 2019 Edition
by R. Scott Heasley, Esq., Meyers, Roman, Friedberg & Lewis, LPA
Prompt Pay Acts can serve as a blessing or a curse for subcontractors and suppliers.
The blessing: If a general contractor refuses to pay for a subcontractor’s work after it has received payment from the owner, the subcontractor can recover 18 percent interest and possibly attorney fees.
The curse: If a subcontractor or supplier refuses to pay its own subcontractor or supplier, they could face the same penalties.
A 2017 11th District Court of Appeals case, Xtreme Elements, LLC v. Foti Constr., LLC, illustrates the blessings and the curses that can crop up in large scale commercial construction projects. The case involved the construction of a K-12 school facility. The school district entered into an $800,000 contract with general contractor Foti Contracting, LLC. Thereafter, the general contractor hired subcontractor, Xtreme Elements, LLC, to construct an 18-inch thick, monolithic sidewalk pour and perform other work on the project. The project was designed with an 18-inch-thick sidewalk between a ball diamond and a parking lot. For perspective, highway concrete is often 11 inches thick and airport runways capable of handling international flights is 17 inches to 20 inches thick. The subcontractor then contracted with a concrete supplier, Associated Associates, Inc.
Near the end of the subcontractors’ work on the project, the owner voiced concerns regarding the sidewalk project. The school district and its owner’s representative were concerned the sidewalk had a “cold joint.” Cold joints can occur when concrete starts to set before additional concrete is added, potentially causing a weakness in the concrete. The subcontractor believed the sidewalk was structurally sound. The subcontractor said it would consider removing the sidewalk if core samples demonstrated there was separation. The owner disagreed, required that Foti replace the sidewalk. When Xtreme refused to do the work, Foti hired a replacement contractor to complete the work and purchased the ready mix from the original supplier. The owner refused to pay Foti for the additional work, Foti refused to pay Xtreme for the sidewalk and other work in dispute and the subcontractor refused to pay its supplier.
The Xtreme filed suit against the Foti seeking damages for breach of contract and related claims. To add to the mix, the ready mix supplier filed a separate action against Xtreme in a different court, which was then consolidated with the first lawsuit. Xtreme counterclaimed against the supplier for breach of contract by failing to timely deliver all of the loads of concrete causing the alleged cold joint.
The subcontractor and the supplier each sought additional damages under, Ohio’s Prompt Pay Act. The act requires contractors, subcontractors and suppliers to pay their subcontractors and suppliers within 10 days of receipt of funds associated with the subcontractor’s work. If the party that received payment refuses to pay the lower tier within 10 days from the date funds were received without just cause, the unpaid party can recover 18 percent interest for all improperly retained funds. The act applies up and down the food chain in construction projects: subcontractors can sue general contractors, suppliers can sue subcontractors, sub-subcontractors can sue subcontractors, suppliers can sue suppliers, etc. If the party is not paid within a total of 30 days from the date funds were received, again without just cause, the prevailing party can, in the court’s discretion, recover its reasonable attorney fees incurred in collecting the due, yet unpaid amount.
The Ohio Supreme Court has held one of the primary purposes of the Prompt Pay Act is to ensure that contractors pay subcontractors and materialmen for their work or materials in a timely manner. However, the Ohio General Assembly intended also to protect contractors by permitting them to withhold payment, or some portion thereof, due the subcontractor where a dispute arises related to the work performed or material provided by the subcontractor or materialman and for contractually agreed retainage.
The trial court in the Xtreme case had to grapple with several issues as it assessed the Prompt Pay claims.
First, the court had to decide what amounts were due and owing to the subcontractor and the supplier. The court determined the owner unjustifiably withheld $19,723.99 in payments to the subcontractor. However, the judge did not award Prompt Pay Act interest because the money was withheld to resolve a dispute involving the work performed. “Courts have determined that prejudgment interest under R.C. 4113.61 is not warranted when the contractor withholds the money ‘in good faith’ on a disputed claim.” While the owner was required to pay the $19,723.99, the trial court held an interest award was not warranted because there was a good faith dispute regarding the “cold joint” issue.
Next, the trial court held an award of attorney fees was not warranted. While the statute requires the court to award attorney fees if payment was improperly withheld, the statute also provides four exceptions, specifically ORC 4113.61(B)(3) provides that, “The court shall not award attorney fees…if the court determines, following a hearing on the payment of attorney fees, that the payment of attorney fees to the prevailing party would be inequitable.”
The judge, who heard evidence during the bench trial, did not hold a separate hearing on the issue of attorney fees because, presumably, he was well aware of the underlying facts of the case. His 22-page Judgment Entry the Court contained a one and one-half page, clear and concise discussion of the prompt pay claims, specifically finding that while prompt pay interest was due to both Xtreme and the ready mix supplier, that it would be inequitable to award attorney fees.
Xtreme appealed for the first time. The court agreed with Xtreme and ordered the judge to hold a formal hearing on the attorney fees. The appellate court held the hearing was specifically required by the statute. Therefore, the Appellate Court held that while the court could have specified that he was going to take evidence on attorney fees without holding a separate hearing, merely using the information from the bench trial did not suffice. When the case was remanded, the trial court promptly (pun intended) held a hearing and re-issued a nearly identical Order regarding the attorney fees.
Xtreme appealed again. Here, the court followed the Ohio Supreme Court’s 2004 decision in Masiongale Electrical-Mechanical, Inc. v. Construction One, Inc. to hold that the award of attorney fees is to be determined within the court’s discretion on a case-by-case basis considering all of the facts. Here it is important to note that this means that the decision is within the trial judge’s discretion, so you cannot be certain of the outcome until the judge makes the decision, and then the Court of Appeals will review it only on an abuse of discretion standard, which is difficult to overcome.
Finally, the trial court held the subcontractor was liable for breach of contract for refusing to pay its supplier. However, the court determined prompt pay interest was not warranted from the subcontractor because, like the dispute between the general contractor and the subcontractor, there was a genuine, good faith dispute between the subcontractor and its supplier, but found that the contractor was unjustly enriched by the suppliers’ concrete and retaining it without payment would be unjust. Therefore, while the subcontractor did not violate the Prompt Pay Act, the contractor did and was ordered to pay the 18 percent interest to the supplier.
The Xtreme case is a cautionary tale. When disputes arise, it is important to consider whether the disputes relate to workmanship or procedural issues like improperly recording a mechanic’s lien. If there are not legitimate questions regarding workmanship, a contractor who withholds payment to a subcontractor or material supplier further down the line does so at great peril. Eighteen percent interest and an award of attorney fees can make a bad situation much, much worse.
For subcontractors and suppliers, prompt pay acts are a blessing as they provide leverage against an unreasonable contractor, when that contractor is withholding payment without cause. Keep in mind, however, a subcontractor can face a prompt pay claim of its own if it does not pay its material suppliers or sub-subcontractors.
Check with your construction lawyer to determine if your state has its own version of Ohio’s Prompt Pay Act that your company can use to its advantage when payment issues arise.
Scott Heasley, Esq., is an attorney with Meyers, Roman, Friedberg & Lewis, LPA, Cleveland, Ohio. Heasley’s practice encompasses representing public and private companies in commercial and general civil litigation and transactional matters. He also represents individuals, families, professionals, and businesses in all phases of dispute resolution including mediation, arbitration, and appeals before state and federal courts. Heasley represents lending institutions in workouts, foreclosures, and bankruptcy matters and defends clients in business disputes, motor vehicle accidents, and transportation matters involving towing and cleanup fees. He also represents plaintiffs in civil cases involving property disputes and collection matters. Heasley has handled multiple housing court matters, representing both plaintiffs and defendants, throughout his career. His transactional experience includes counseling private companies, partnerships, and individuals on their business transactions such as entity formation, contract drafting and review, buy-sell agreements, leasing, and commercial real estate transactions. He can be reached at (216) 831-0042, Ext. 115, or email@example.com.