Apologies for this article’s salty title, but it is an homage to fictional mob boss Paul Cicero’s business philosophy in Martin Scorsese’s timeless movie, “Goodfellas.” While I would never condone it, it is not hard to understand why some subcontractors fantasize about employing Paulie’s business practices to ensure timely payment.
In a world where “pay-when-paid” clauses are the norm, subcontractors and material suppliers find themselves getting squeezed by higher tier contractors, and delayed payment can have devastating consequences for their cash flow. While payment friction between general contractors and subcontractors will never be eliminated, subcontractors and suppliers should know that they have a powerful tool at their disposal – the Prompt Payment Act.
While payment friction between general contractors and subcontractors will never be eliminated, subcontractors and suppliers should know that they have a powerful tool at their disposal – the Prompt Payment Act.
Every state but New Hampshire has a Prompt Payment Act for public projects, and about a third of the states have one for private projects. This article focuses on Ohio’s Prompt Payment Act (Ohio Revised Code §4113.61), which is applicable to both private and public projects. The purpose of Ohio’s Prompt Payment Act (OPPA) is to provide an incentive for general contractors to promptly pay subcontractors. In-tercargo Ins. Co. v. Mun. Pipe Contractors, Inc. 127 Ohio Misc.2d 48, (2003). OPPA provides lower tier subcontractors and material suppliers with additional statutory claims in the event a general contractor receives payment for their work but unjustifiably refuses to timely pay them.
To leverage OPPA, subcontractors and material suppliers must submit an invoice for their services and/or materials to the general contractor in time to allow the general contractor to include the invoice in its application for payment to the property owner. Ohio Revised Code §4113.61(A)(1). If the general contractor receives payment from the property owner on an application that contains work performed by its subcontractor or material supplier, the general contractor must pay its subcontractor or material supplier for that work within 10 days after receipt of payment from the owner. Id. If the general contractor only receives partial payment, it must pay subcontractors and/or material suppliers an amount proportional to the portion of their labor or work that was approved by the owner. Id
Failure to comply with OPPA can result in stiff penalties. In addition to the payment due, beginning on the 11th day following receipt of payment from the property owner the general contractor must also pay interest in the amount of 18 percent per annum until full payment is made. Id. If the general contractor has still not made payment after 30 days, OPPA authorizes subcontractors to bring a civil lawsuit against the general contractor to recover its contractual and statutory damages. Ohio Revised Code §4113.61(B)(1). If that lawsuit results in a finding that the general contractor violated OPPA, the prevailing party may also be able to recover its reasonable attorneys’ fees and court costs. Id.
General contractors still have defenses to prompt payment claims. General contractors do not have any obligation to pay for labor or materials where there is a legitimate dispute as to the workmanship or quality. Ohio Revised Code §4113.61(A)(1). Additionally, courts do not have to award attorneys’ fees to the prevailing party if after a hearing it is determined the payment of attorneys’ fees would be inequitable. In deciding whether attorneys’ fees are appropriate, courts must consider all relevant factors, including but not limited to: “(a) The presence or absence of good faith allegations or defenses asserted by the parties; (b) The proportion of the amount of recovery as it relates to the amount demanded; (c) The nature of the services rendered and the time expended in rendering the services.” Ohio Revised Code §4113.61(B)(2) (a-c).
In a recent case, a trial court’s decision not to award attorneys’ fees under OPPA was upheld, where a subcontractor incurred approximately $250,000 in attorneys’ fees to obtain an approximately $20,000 award under OPPA. Xtreme Elements, LLC v. Foti Contracting, LLC, 2018 WL 3999662, 2018 Ohio 3323 (11th Dist. 2018). In a 2-1 decision, the court of appeals affirmed the trial court’s decision that an award of attorneys’ fees was inequitable especially since the amount of attorney time spent on prosecuting the prompt payment claim was not categorized separately from time spent on other claims in the lawsuit. Id. pg. 5.
Ohio’s Prompt Payment Act can help your clients get paid, but the outcome will turn on the specific facts at issue. If you enjoyed this article or if you have any other construction law questions, drop me a line. Grant Keating