Enforce Prompt Payment Act Violations

How would you like to earn 18% annually on the unpaid balance owed to you for the labor or materials provided to a construction project?  You will not find anyone offering that kind of interest rate in today’s economy!  However, if you can prove that the debtor violated Texas Property Code Chapter 28, “The Texas Prompt Payment Act,” then you are entitled to recover this amazingly high interest rate as a penalty for nonpayment.

How is the Prompt Payment Act Violated?

Violation by the property Owner

When a property owner receives a timely and allowed written payment request from a contractor, then the owner must pay the amount to the contractor by the thirty-fifth (35th) day after the owner receives the request; failure to do so is a violation of the statute.

Violation by the General Contractor (those who have a direct contract with the property owner)

When a general contractor receives payment from an owner, the general contractor must pay each of its subcontractors the portion of the owner’s payment attributable to the subcontractors’ work performed under its contract with the contractor within seven (7) days of receiving the payment from the owner; failure to do so is a violation of the statute.

Violation by a Subcontractor (those who do not have a contract with the property owner or general contractor)

When a subcontractor receives payment from a contractor, the subcontractor must pay each of its subcontractors and suppliers the portion of the contractor’s payment attributable to its subcontractors and suppliers for work performed under its contract with them within seven (7) days of receiving the payment from the contractor; failure to do so is a violation of the statute.

What is the Penalty for Violating the Prompt Payment Act?

Any unpaid amount that is required to be paid pursuant to the Act begins to accrue interest the day after the date that payment becomes due at 1.5 percent each month (or 18% a year).  Interest stops accruing on the earlier of: (1) the date payment is made; (2) the date of mailing if payment is received within three days of being mailed; or (3) the date a judgment is entered by a court for a violation of the Act.

If you file a lawsuit and prove a violation of the Act, then in addition to the interest rate penalty, the court is also authorized to award costs and reasonable attorneys’ fees.

Right to Suspend Work for Non-Compliance of the Prompt Payment Act

If the project is ongoing, and if the owner fails to pay the contractor the undisputed invoiced amount within the timelines set forth under the Act, then the contractor or any subcontractors may suspend contractually required performance on the tenth (10th) day after the contractor or subcontractor gives the owner (and the owner’s lender under certain circumstances) written notice of the nonpayment and the intent to suspend performance.

Pursuant to the Act, a contractor or subcontractor who suspends performance as permitted under the Act is not: (1) required to perform until paid the amount allowed under the Act, plus any costs incurred for demobilization and remobilization.  Further, the Act states that the contractor/subcontractor will not be responsible for damages resulting from the suspended work if he is not first notified in writing before the suspension that payment has been made or that a good faith dispute exists for withholding the payment.

Note that a notification that a “good faith” exception exists must be in writing and contain a list of specific reasons for the nonpayment.  If one of the specific reasons for withholding payment includes labor, services, or materials provided by a subcontractor that are not provided in compliance with the contract, then the subcontractor is entitled to a reasonable opportunity to (1) cure the listed item; or (2) offer a reasonable amount to compensate for the listed item that cannot be promptly cured.

Exception to Making Full Payment When There is a “Good Faith” Dispute

If a “good faith” dispute exists concerning the amount owed, then the party withholding payment can withhold not more than one hundred percent (100%) of the difference between the amount it believes is due and the amount the invoicing party claims is due.  For example, if the invoicing party claims that it is owed $100,000.00 and the withholding party believes only $75,000.00 is due, then the withholding party may withhold up to $25,000.00 of the invoice amount and no more.

Owner’s Exception for Lender’s Failure to Disburse Funds

The owner is excused from making payment to its contractors on projects where the owner has obtained a loan for the construction if: (1) the owner has timely and properly requested disbursement of proceeds from the loan; and (2) the lender is legally obligated to disburse such proceeds to the owner, but has failed to do so within thirty-five (35) days after the date the owner received the contractor’s payment request.  Under these circumstances the owner is not obligated to make payment to the contractor until the fifth (5th) day after the date that the owner receives the loan proceeds.

How Do You Enforce Prompt Payment Act Violations?

There are two primary ways to enforce Prompt Payment Act violations: (1) through a Payment Demand Letter; or (2) by Filing a Lawsuit.  Through a payment demand letter, you advise the debtor of the Act, penalties for violating the Act, that you have information in which to believe they violated the Act, and that if payment is not immediately made a lawsuit will be filed to enforce a violation of the Act.  Through a lawsuit, you allege a violation of the statute as a “cause of action” and you request the court to award monetary damages in the form of penalties against the defendants for violation of the Act.