Kansas Bar Journal
75 J. Kan. Bar Assn. 5, 22-28 (2006).
The Fairness in Private Construction Contract Act: Legislative Fairness or Oxymoron?
Kansas Bar Journal75 J. Kan. Bar Assn. 5, 22-28 (2006)The Fairness in Private Construction Contract Act: Legislative Fairness or Oxymoron?By Christopher F. BurgerI. Introduction
Construction is behind schedule, payments to subcontractors are untimely, and there is a threat of work stoppage. The owner needs the job done now, and the subcontractors need payment. The owner, design professional, contractor, and subcontractors prepare to meet to discuss how to get this done, and each party seeks advice as to its rights and responsibilities. In rendering advice, if you limit your analysis to the contract itself - and applicable common law - then you may overlook changes to the parties' respective rights through new legislation that redefines many of these relationships.
A new law titled the Kansas Fairness in Private Construction Contract Act(fn1) (Act) came into effect on July 1, 2005, and can be found in the 2005 Supplement at K.S.A. § 16-1801 et. seq. It is neither a standardized model act nor a duplication of the efforts of another state. Instead, it is an original piece of legislation having its genesis in the efforts of several Kansas subcontractors who sought to provide more tools of ensuring the payment of amounts due.
The Act is the second piece of legislation in Kansas concerning construction in the past few years(fn2) and represents a pioneering effort by Kansas to standardize payment in nonresidential, private construction projects. The Act is broad and controlling and seeks to give each party equal bargaining power by voiding, as a matter of law, a host of otherwise "typical" construction provisions. Specifically, the Act requires certain language to be included in each contract for nonresidential, private construction; renders certain contract language void and unenforceable; and creates a form of statutory breach of contract. This article describes the Act and raises several questions about its implementation.
The Act's primary intention concerns payment. Depending upon its application to the subject project and party,(fn3) the Act defines the obligations concerning payment and the rights that can arise due to nonpayment.
Payments must be prompt
The Act requires that contracts provide for the prompt payment of each "timely, properly completed, undisputed" request for payment and establishes remedies for nonpayment.(fn4) An owner must pay its contractors and its designers(fn5) all "undisputed" amounts due less retainage under each timely, properly completed request for payment, even if the owner disputes some of the amounts due under the application for payment.(fn6) Payment of all undisputed amounts must be made within 30 days of the owner's receipt of the application.(fn7) If the owner fails to pay these sums within the 30-day window, interest at 18 percent per annum begins to accrue on the undisputed amount on the 31st day.(fn8) Interest also accrues on any unpaid retainage at 18 percent per annum upon the first business day after the retainage payment becomes due.(fn9) If the owner does not pay the interest to the contractor, the Act authorizes the contractor to stop work.(fn10)
Equally, each contractor (including subcontractors in that definition) having a contract with a subcontractor of whatever tier must pay that subcontractor all undisputed amounts due it (including retainage, but only once it is released by the owner)(fn11) within seven "business days" of its receipt of payment by the preceding tier of contractor so long as there exists a timely, properly completed request for payment.(fn12) Again, the mere fact that a party disputes some of the amounts outlined in a payment application does not authorize the withholding of the entire amount. If the contractor does not pay these sums to its subcontractor within the seven-business-day window, interest at 18 percent per annum begins to accrue on the undisputed amount on the eighth business day.(fn13) Each tier of subcontractor has a separate seven-day window in which to expect payment.(fn14) If the contractor does not pay the interest to its subcontractor, the Act authorizes that subcontractor to stop work.(fn15)
The Act, however, is not a panacea for payment. Owners and contractors will likely begin to pay more attention to payment applications, which will give rise to issues about whether payment applications are "timely" and "properly completed," and whether the sums being sought are "undisputed" or otherwise are "amounts due." The Act gives no guidance on the elements for a legitimate "dispute" of a payment application. "Disputes," therefore, could be simple arithmetic differences as well as offsets for claims being made or threatened to be made concerning the quality of the underlying work.(fn16) These parties must clarify these terms in the contract so that the various tiers will know if something is genuinely disputed. Not only can the parties lay out objective requirements and notice provisions, but also they can better define the more subjective terms. For example, the contract can define grounds for "disputes," and may even put in place a mechanism for "disputing" such as outlining notice responsibilities of an "unapproved" item in pay applications.
Work stoppages are allowed without repercussion
The Act authorizes contractors and subcontractors, regardless of their tiers, to stop work if they are not paid all undisputed amounts due to them within seven business days of the payment's due date.(fn17) In order to stop work under the Act, the unpaid party must give seven "additional business days" written notice to the owner and, if the unpaid party is a subcontractor, the notice must also go to the contractor.(fn18) Upon expiration of these two separate seven-business-day periods, the unpaid party, without prejudice to any other available remedy, is "entitled to suspend further performance until payment, including applicable interest, is made."(fn19)
In the event of suspension and demobilization the Act states:
The contract time for each contract affected by the suspension shall be extended appropriately and the contract sum for each affected contract shall be increased by the suspending party's reasonable costs of demobilization, delay, and remobilization.(fn20)
As written, the Act grants every contract affected by the suspension not only more time, but also more money to the same extent as the suspending party's reasonable costs.(fn21) The Act, however, does not specify who pays for the additional contract sums or who bears the burden of the increase in time when the suspension affects an innocent owner who may be unable to grant an extension. This provision could have a damaging impact on innocent owners who find their projects suddenly and hopelessly behind schedule, despite efforts to ensure that "time is of the essence." It may also result in owners making more claims against their lenders if the lender fails to release funds or otherwise make payments in a timely fashion. The Act is also silent as to whether the relief of time extensions and additional contract sums are the exclusive remedy for all affected parties. These are issues that should be addressed contractually along with the issue of how the parties construe the Act with regard to any "time is of the essence" provisions.
Contingent payment provisions are no defense to a lien or bond claim
Another provision of the Act concerns lien or bond claims. Under the Act, contract provisions making payment to a subcontractor "contingent or conditioned" upon receipt of a payment from any other private party are not a defense to a claim to enforce a mechanic's lien or a bond to secure payment of claims.(fn22) Such provisions, however, remain enforceable on breach of contract claims. Accordingly, lien and bond claims have heightened importance since their pursuit can render contingent payment provisions effectively unenforceable.
Mechanic's liens are inviolate
The mechanic's lien rights under article 11 of chapter 60 of Kansas Statutes Annotated remain fully enforceable despite any language to the contrary in a contract, except to the extent of a payment received.(fn23) Except as may be conditioned to receive a payment (only to the amount of the payment received),(fn24) the contract cannot serve to waive, release, or extinguish such a right, and a party...