Time for Prompt Payment Acts in Washington & Louisiana?

On February 10, 2009 by

This weekend, I read a post on the South Carolina Construction Law Blog about Texas’ Prompt Payment Act.  It caused me to do a little online research on similar acts around the country, finding them in Alabama, Tennessee, Georgia, Wisconsin, New York, federally, and elsewhere.

A “Construction News” pamphlet from Baker Donelson [pdf] in the Winter of 2004 has a good article about the statutes in AL, TN & GA, the theme of each act simply being this:  “Prompt Payment Acts Set Payment Guidelines for Construction Work.”

It’s no secret that payment problems are rampant in the construction industry.  And unfortunately, the old statement that “possession is 90% of the law” has some truth to it.

Large well-funded construction companies can hold progress payments at the end of a project for trivial reasons, and strong-arm its subcontractors into settling for less.  Prompt Payment Acts aim to equalize the playing field a bit, applying penalties against those who misapply funds or try to strong-arm subs and suppliers.

So, do they exist in Louisiana and Washington?   Mostly….no.

Both Louisiana and Washington lack a pure “Prompt Payment Acts.”  Those victim to the misapplication of funds must rely on jurisprudence or other possibly applicable statutes, discussed below.

Misapplying Funds in Louisiana
Buried within the Private Works Act in Louisiana is La. R.S. 9:4814 (A), which provides as follows with regard to the misapplication of funds:

No contractor, subcontractor, or agent of a contractor or subcontractor, who has received money on account of a contract for the construction, erection, or repair of a building, structure, or other improvement, including contracts and mortgages for interim financing, shall knowingly fail to apply the money received as necessary to settle claims to sellers of movables or laborers due for the construction or under the contract. Any seller of movables or laborer whose claims have not been settled may file an action for the amount due, including reasonable attorney fees and court costs, and for civil penalties as provided in this Section.

This provision actually works as a “prompt payment” requirement, but as is evidence from its terms it only has limited applicability.

First, the contractor must “knowingly” misapply the funds.  Second, the only parties qualified to recover the penalties of the provision are “sellers of movables” and “laborers.”

The Private Works Act in Louisiana specifically distinguishes between laborers and subcontractors, and so subcontractors who provide labor to the project would not likely qualify for the penalties under La. R.S. 9:4814 – although the matter has never been decided.

Unfortunately for everyone not mentioned by §9:4814, Louisiana doesn’t provide a remedy when funds are misapplied, and the parties must rely exclusively on the conditions of its contract.

Misapplying Funds in Washington
In 2006, the Washington Court of Appeals published an interesting reversal in Westview Investments, Ltd. v. U.S. Bank National Association [pdf of decision], addressing the issue of misapplying construction funds in Washington.

Since progress payments are not funds held in “trust” by statute in Washington, the court explained that they may be considered trusts if appointed as such by the parties – namely, through contract.

According to the Westview decision, progress payments made by a project owner to a general contractor constitute “trust funds” for the benefit of subcontractors, when the agreement between owner and contractor is based on AIA A201 (1997).

Interfering with any “trust funds” would be a tortious conversion – and the Westfield court even goes so far as to rule that banks may be liable for misappropriating trust funds when it uses these funds to  pay down the borrower’s debt to the bank (see discussion here).

Time for A Prompt Payment Act?
Is it time for a Prompt Payment Act in these Washington and Louisiana?

While many statutes and regulations have drawbacks, there doesn’t seem to be a downside to requiring contractors to pay its bills!

Litigation is costly and time-consuming – and it doesn’t seem fair that after a long, expensive battle with a better-funded opponent, subcontractors and suppliers must settle for the principal debt.

There are ways to punish contractors in Louisiana and Washington when funds are misapplied, but it’s always dependant on circumstance.  A Prompt Payment Act would help equalize the playing field for subcontractors and suppliers who rely heavily on prompt payments.

On Feb 10, 2009

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  • Hi Scott,
    For public contracting in the State of Washington, there is a Prompt Pay Act: chapter 39.76 RCW.
    Also related to this subject in the public sector is a bill before the Washington Legislature now that would require owners to issue a change order for the amount of undisputed change order work and then pay that in a timely manner. Some public owners have been holding all change orders until the end of the project, with the result that no payments are made on the change order work to the contractor and the subcontractors end up suffering. See HB 1195 (http://apps.leg.wa.gov/billinfo/summary.aspx?bill=1195&year=2009).

  • Hi Mike. Thanks for stopping by with the comment and the perspective from the public sector. Perhaps we’ll do another post with regard to public projects, and federal projects.

  • Martha Griset

    Hi Scott-
    There is a late payment statute in Louisiana, as well. Please see LA R.S. 9:2784. Note, however, it is limited to non-residential construction..