Payment – often one of the most negotiated provisions in prime contracts and subcontracts and therefore a common claim in litigation. Getting paid and paid timely is of critical significance to contractors. If a project owner does not pay its general contractor timely, it will have massive consequences to project morale and may end up creating payment claims that might substantially delay the project. If the parties cannot reach resolution and depending on the payment provisions of the prime contract or subcontract – including any withholding or offset provisions, contractors can seek recovery for overdue payment by way of the interest and attorneys’ fees mechanism detailed in Chapter 28 of the Texas Property Code, the Texas Prompt Pay Statute.

When the Upstream Party Needs to Pay

If an owner or a person authorized to act on behalf of the owner receives a written payment request from a general contractor for an amount that is allowed to the general contractor under the contract for properly performed work or suitably stored or specially fabricated materials, the owner shall pay the amount to the general contractor, less any amount withheld as authorized by statute, not later than the 35th day after the date the owner receives the request. Then, the general contractor must pay its subcontractors (and then the subcontractor must pay its subcontractors) not later than the 7th day after the date the general contractor receives the owner’s payment.

No Waiver

The contracting parties cannot waive the obligations contained in Chapter 28 of the Texas Property Code. However,  A written contract between an owner and a contractor for improvements to or construction of a single-family residence may provide that the payment required by the Prompt Pay Statute be made not later than a date that occurs before the 61st day after the date the owner receives the payment request.

Remedies

The penalty for an owner or a contractor that fails to submit payment in a timely fashion under the statute is the accrual of interest at the rate of 1‐1/2 percent each month until paid or entry of judgment.

A general contractor also has the right to suspend work after notice unless contract is for: (1) construction of or improvements to a detached single‐family residence, duplex, triplex, or quadruplex; or (2) improvements to real property for a governmental entity. Subcontractors also have the right to suspend work after notice but only when the owner fails to pay the general contractor the undisputed amount.

Good-Faith Exception

If a good faith dispute exists concerning the amount owed for construction of or improvements to a detached single‐family residence, duplex, triplex, or quadruplex, the owner, contractor, or subcontractor may withhold not more than 110 percent of the difference between the amount the obligee claims is due and the amount the obligor claims is due.

If the dispute does not relate to construction of or improvements to a detached single‐family residence, duplex, triplex, or quadruplex, then no more than 100 percent of the difference may be withheld. However, if the withholding party is ultimately found by a Court or arbitration panel to be at fault for the breach, some Texas courts have held the withholding party will be on the hook for interest on the withheld amount – despite any alleged good-faith basis.

Contingent Payment Clauses

A pay-if-paid clause, more eloquently called a contingent payment clause, requires the owner pay the general contractor before the general contractor has to pay its subcontractor.  In legal parlance, it makes payment from an owner a condition precedent to the general contractor paying its subcontractor. If the general contractor does not receive payment from the owner, the general contractor is not obligated to pay its subcontractor.

If or when you need assistance evaluating whether you have a valid prompt payment claim, the attorneys at GS are available to answer any questions you may have.  You may contact us at info@gstexlaw.com.

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