« Back Prompt Pay Act: Great Asset For Subs, Major Danger For General Contractors

January 30, 2017

Ohio’s Prompt Pay Act provides significant rights for subcontractors: interest on amounts not properly paid within 10 days of receipt of payment by the general contractor at a whopping 18% and attorneys fees where a court concludes the general contractor did not act in good faith. If a dispute goes on for years, a general contractor can potentially be hit with a judgment for interest and attorneys fees that rivals or even exceeds the underlying amount at issue. A recent case, Xtreme Elements, LLC v. Foti Contracting, LLC, makes just that point.

In a school project in northern Ohio, the general contractor had two problems with its concrete subcontractor:

  1. As the subcontractor poured a concrete sidewalk in two layers, the first layer set up before the second one was poured, forming a “cold joint.” The owner refused to accept it, so the general contractor tore it out and replaced it and then refused to pay the subcontractor for the original work. The subcontractor requested that core samples be taken to show whether there was indeed a lack of structural integrity and indeed a “cold joint.” The owner and the general contractor refused to do any core sampling.
  2. On another area of sidewalk, the subcontractor left a finish that was so rough the owner refused to pay for that portion of sidewalk as well. The general contractor followed suit and did not pay the subcontractor for that work. However, the owner and the general contractor decided to let that sidewalk go through the winter and see how it looked the following year. They determined after that year that the sidewalk was acceptable. The owner then paid the general contractor for that work, but the general contractor did not pay the subcontractor. Mistake.

Regarding the first dispute - the “cold joint”:

Most general contractors would be comfortable withholding payment under similar circumstances where the owner refuses to accept the sidewalk in its current condition. That was not the determination made by the trial court or the appellate court, however. Instead it was determined that the contractor acted unreasonably and should have taken the core samples. The important lesson is that rejection by the owner alone does not provide cover for the general contractor in refusing to pay the subcontractor. Fortunately for the general contractor, in this case, the court also concluded that even though the general contractor had acted unreasonably it had not acted in bad faith. If the court had determined that the general contractor had acted in bad faith, the subcontractor would also have been entitled to 18% interest and reasonable attorneys fees. That was a close call.

Regarding the second claim - the "rough finish":

The general contractor clearly failed in its responsibilities after it was paid for the sidewalk with the rough finish. It should have paid the subcontractor after it was paid. No doubt the general contractor was thinking that it was in a general dispute with the subcontractor, with a couple of different issues, and it wasn't going to release any money until they were all resolved. That was the wrong conclusion. In Ohio, the law requires a general contractor to pay the subcontractor for work for which the general contractor has been paid when there is no dispute regarding that particular work. Moreover, because the violation was so clearly blatant — there was no reason for not paying — the court also found that the general contractor acted in bad faith and awarded 18% interest from the time 10 days after the general contractor had been paid by the owner. The general contractor must have believed it had caught a lucky break, though, when the trial court further determined that an award of attorneys fees to the subcontractor would be "inequitable." But, the trial court did so without what the appellate court said was a required hearing. As a result, the appellate court ordered the trial court to hold another hearing on whether attorneys fees should be awarded. (The hearing on attorneys fees is now scheduled for March 2017.) In hindsight, we can see that the general contractor could have easily avoided this result by monitoring payments for subcontractor work carefully and, once it was paid by the owner, paying the subcontractor.

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