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Joe Virene, Julia Edwards

Every contractor’s end goal on a project is to get paid, and to get paid timely.  This article covers some of the laws in place in Texas to enforce prompt payment.

What is Prompt Pay?

            The Texas Legislature has enacted statutes to encourage owners and contractors to promptly pay lower tier contractors on both public and private projects. Both statutes create deadlines for payment and award certain damages if payment is not timely made after receipt of funds from a higher tiered contractor or project owner. 

            Chapter 28 of the Property Code (the “Private Prompt Pay Act”) relates to private projects and provides:

  • An owner must pay contractor for properly performed work within 35 days of written payment request;
  • A contractor must pay subcontractor within 7 days of payment from owner; and
  • A subcontractor must pay its subcontractors within 7 days of payment from contractor.

See Tex. Prop. Code §28.002 (emphasis added).

            Similarly, Chapter 2251 of the Texas Government Code (the “Public Prompt Pay Act”) requires a governmental agency to pay its contractors within 30 days and contractors to pay subcontractors (and downward) within 10 days.  See Tex. Gov’t Code § 2251.021.

Note: Neither of these rights can be waived by contract, and any attempt to do so is void.  See Tex. Gov’t Code § 2251.004; Tex. Prop. Code § 28.006.

            To give some teeth to these obligations, a payment claimant will be entitled to recover specified damages in the event of delayed payment.

The Relief Provided: Interest and Attorneys’ Fees

            First, both statutes award interest to a claimant on overdue payments.  The Private Prompt Pay Act provides for the maximum amount currently allowed by law— interest at the rate of 1-1/2 % each month (18 % per year).  Tex. Prop. Code §28.004.  The Public Prompt Pay Act provides interest at a significantly lesser rate: 1% plus the prime rate published in the Wall Street Journal on the preceding July 1st.  See Tex. Gov’t Code § 2251.025.  The prime rate has been sitting at 3.5%, making the interest rate for violations of the Public Prompt Pay Act only 4.5% per year.

            Both acts also allow a court to assess attorneys’ fees against the non-paying party.  However, the award of attorneys’ fees is only mandatory on a public project. Compare Tex. Prop. Code §28.005 (“In an action brought under this chapter, the court may award costs and reasonable attorney’s fees as the court determines equitable and just.”), with Tex. Gov’t Code § 2251.043 ( . . . “the opposing party, which may be the governmental entity or the vendor, shall pay the reasonable attorney fees of the prevailing party.”).  Under either act, if you bring a payment claim and lose, you may yourself be responsible for attorneys’ fees!  

Good Faith Dispute and Exceptions to Payment Requirements

            So, why might a payment claimant lose?  If there is with a good faith dispute regarding a contractor’s performance, the statutes provide exceptions to the accrual of interest on prompt pay claims.

            Section 28.003 of Private Prompt Pay Act allows for withholding payment where there is a “good faith dispute.”  The statute does not clearly define what constitutes a “good faith dispute,” but it does indicate it “includes disputes regarding whether the work was performed in a proper manner.”  Id.  In determining what constitutes a good faith dispute, one court has considered the fact that a project was substantially complete prior to invoicing as evidence to rebut the good faith dispute exception.  See RAJ Partners, Ltd. v. Darco Const. Corp., 217 S.W.3d 638, 647 (Tex. App.—Amarillo 2006, no pet.).  If a good faith dispute exists, the obligor is permitted to withhold not more than 100% of the difference of the amount the claimant alleges is due and the amount the obligor claims is due.  For residential projects, the allowed withholding is increased to 110% of the difference. Tex. Prop. Code §28.003(a).

            The Public Prompt Pay Act provides a similar exception where there is a “bona fide dispute” between the “political subdivision and vendor”, “vendor and subcontractor” or “subcontractor and its supplier.”  Tex. Gov’t Code § 2251.002 (2), (3).  Notably one court has held that this exception does not apply to state agencies, but only to a political subdivision.  See State v. Mid-S. Pavers, Inc., 246 S.W.3d 711, 732 (Tex. App.—Austin 2007, pet. denied).  Under that case, the exception would not apply to protect a governmental entity.  

            The Public Prompt Pay Act also requires governmental agencies to notify vendors where there is an “error in an invoice,” not later than the “21st day after the date the entity receives the invoice.” Tex. Gov’t Code § 2251.042 (a).  This encourages the project owner to take affirmative action to fix payment issues, rather than rely on an error to deny payment.  House Bill 1476, becoming effective September 1, 2021, will broaden this provision and require notice where there is also a “disputed amount.”  The new law will also require a statement detailing which portion of the invoice is disputed. 

            Finally, there is also an exception in the Public Prompt Pay Act where the “invoice is not mailed to the person to whom it is addressed in strict accordance with any instruction on the purchase order relating to the payment.”  Tex. Gov’t Code § 2251.002 (4).  Given this, contractors should make sure they are paying close attention to payment instructions.

ABOUT THE AUTHORS

Joe Virene combines deep industry knowledge with efficient dispute resolution skills in and out of the courtroom to help clients navigate the various challenges that arise during sophisticated construction projects. With broad experience handling every issue and dispute imaginable – contract negotiation and drafting, payment disputes, lien filings, suspensions and delays, construction and design defect claims, plus many more – Joe is well-equipped to guide clients through projects from start to finish. His client list runs the gamut of businesses working on industrial, pipeline, oil field and general construction projects, including suppliers, distributors, subcontractors, general contractors, project owners and engineers. He can be reached at jvirene@grayreed.com.

An active member of ABC Houston and Vice-Chair of ELITE’s Leadership Committee, Julia Edwards joined Gray Reed’s litigation section in 2018 after participating in the firm’s summer associate program. While attending The University of Texas School of Law, Julia received the Dean’s Achievement Award for “Outstanding Student in Construction Litigation” and served as articles editor for The Review of Litigation. She can be reached at jedwards@grayreed.com.

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