Jake Mitchell and Jackson Nichols | Construction Law Now Blog
Most jurisdictions have prompt payment statutes requiring timely payments to contractors on construction projects. Washington, DC enacted its own statute in 2013 and recently updated it to clarify the common practice of setoff (which we addressed in our September 2022 post). As stated in that post, “[i]n the construction context, a party can offset a payment obligation to a receiving party with any damages suffered on another project due to the receiving party’s actions. The right to setoff frequently is expressly stated in the contract.”
DC’s Prompt Payment Act
Understanding prompt pay laws and their application is crucial for contractors to create additional leverage when accounts go to collections.
DC’s Prompt Pay Act applies to first- and second-tier subcontractors on private construction projects only—it does not apply to public projects. The Act requires contractors and first-tier subcontractors to pay their subcontractors for undisputed amounts within seven days after the higher-tier contractor receives payment for that work. An undisputed amount is defined as “an amount owed on a contract or a subcontract for which there is no good-faith dispute, including any retainage withheld.”
Penalties include an interest of 1.5% per month on any undisputed amount that is not timely paid. Additionally, both contractors and subcontractors can sue for attorney’s fees for recovering unpaid amounts. Importantly, courts are required to award the attorneys’ fees incurred in a collection action if the contractor or subcontractor prevails in a lawsuit to collect interest penalties from an owner, contractor, or another subcontractor, as applicable. Accordingly, attorneys’ fees generally are not recoverable until the end of a collection lawsuit. However, the possibility that such fees can be awarded will often lead to a quicker settlement of a dispute because the upper-tier contractor does not wish to risk paying such fees.
Pay if Paid in DC
Another critical and often overlooked feature of the Act for subcontractors is that it prohibits contractors from using pay-if-paid language in subcontracts to prevent mechanics’ liens or contractor payment bond claims. However, such claims are typically subject to tight filing and notice deadlines, generally within 90 days of the last day of work or the completion of a project. Thus, contractors must be aware of those deadlines and not wait to consult legal counsel.
DC’s Right to Setoff
Until this year, DC law had been silent about whether a party could employ setoff provisions in public or private contracts. In our September 2022 post, we noted that we expected a new update would be forthcoming soon. The new bill has now been signed into law, and it expressly forbids a contractor or subcontractor on any DC project from deducting or withholding “a subcontractor’s or lower-tiered subcontractor’s payment for the purpose of offsetting any other contractual obligation or work to be completed.”
In other words, higher-tier contractors cannot withhold contract balances on a given project based on amounts allegedly owed by a lower-tier subcontractor on a different construction project. The law also provides that, for any contract executed after March 31, 2023, any contract provisions that create a right to setoff are void as against public policy and therefore unenforceable.
Conclusion
Contractors and subcontractors alike should be aware of all of their rights when it comes to prompt pay statutes. DC provides robust protection for contractors or subcontractors who have outstanding claims for payment. The best strategy for seeking a speedy resolution to any payment claims often involves asserting a combination of prompt payment claims with liens or bond claims. Experienced counsel should be engaged early in the process to ensure that any contractors do not waive important rights they may have to such claims.
When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.