Chapter VIII Payments

• Library: SC Construction Law Desk Book (SCBar) (2022 Ed.)

Chapter VIII Payments

Bonnie A. Lynch Joshua D. Spencer

A. Introduction

The South Carolina Legislature has enacted several statutory provisions related to payment on construction projects in the State. These statutes create a statutorily required timetable for payments on construction projects in South Carolina, and establish that performance in accordance with a contract entitles a subcontractor to payment without the condition precedent of the contractor being paid by the owner. Additionally, they outlaw pay-if-paid provisions in construction contracts and make it a criminal act in South Carolina to misappropriate funds paid to a contractor or subcontractor for that contractor's or subcontractor's laborers, subcontractors, and suppliers. They also set up a process for the recovery of attorney's fees and interest for unpaid amounts due the contractor.

The statutes applicable to construction payments are designed to prevent wrongdoing in the construction payment process, particularly by those who have received monies, due to others, from an owner, owner's financial institution, or a contractor. This chapter addresses the four major statutory provisions in South Carolina that apply to payments on construction projects.

B. Payments to Contractors, Subcontractors, and Suppliers

In 1990, the Legislature enacted "Payments to Contractors, Subcontractors, and Suppliers."¹

1. Pay-if-Paid Provisions Unenforceable

South Carolina Code Ann. § 29-6-20 (2021) provides, "[p]erformance by a contractor or subcontractor in accordance with the provisions of his contract entitles him to payment from the party with whom he contracts." This is, perhaps, the most significant portion of the statute because it appears to outlaw "pay-if-paid" provisions in South Carolina. The effect of this provision is made clear with a simple example. Dr. Whelchel, an owner, hires Pruitt as his contractor to build Whelchel a dental office. Pruitt, in turn, hires Cash to put the roof on the dental office. Cash performs his work satisfactorily and is, therefore, entitled to payment from Pruitt regardless of whether Whelchel has paid Pruitt for that work or not (i.e., performance by Cash in accordance with the provisions of his contract entitles him to payment from Pruitt, the party with whom he contracted).

2. Statutory Timetables for Payments

At S.C. Code Ann. § 29-6-30 (2021), the Legislature set forth a timetable for payments to which all construction projects in South Carolina must adhere.²"When a contractor or a subcontractor has performed in accordance with the provisions of his contract, the owner shall pay the contractor. . . within twenty-one (21) days of receipt by the owner of any pay request based upon work completed or service provided under the contract."³ The owner must make the payment "by mailing via first class mail or delivering the undisputed amount of any pay request."⁴ Once the contractor is paid by the owner, the contractor is required to pay his subcontractors within seven days of receiving payment by the owner.⁵ Those subcontractors then have seven more days to pay their subcontractors.⁶ As with the owner, these payments must be made by "mailing via first class mail or delivering the full amount received for that subcontractor's work and materials based on work completed or service provided under the subcontract."⁷

The following flow chart summarizes the statutory payment timeline requirements:

Contractor's Payment Application	21 days	Owner Pays Contractor	7 days	Contractor Pays Subcontractors
		Subcontractors pay their own Subcontractors		7 days

The owner is allowed 21 days from the date of submission of the contractor's payment application to make the payment. This arrangement allows time for verifying that the work in place is acceptable and for obtaining draws from any construction lender on the project. Once the contractor's payment application is received, it will need to be processed by the owner to ensure that it is accurate, particularly with regard to the percentage of work completed. On projects where an architect has been retained to administer the contract, the architect will need to review the contractor's work and certify the payment application. Additionally, if a construction lender is in place, that lender will often have its own project inspector who will independently verify the percentage of work complete and report back to the bank. Of course, all of this takes some time, and it may be the reason that the Legislature allowed 21 days, as opposed to a shorter period of time, for payment from the owner to the subcontractors to be made. Once payment is made by the owner, the contractor and his subcontractors are only given seven days to make payment to their subcontractors. At this point, the contractor and subcontractors should have already verified the amount of work that their subcontractors performed, as that work was likely included in the contractor's payment application made to the owner.

While S.C. Code Ann. § 29-6-30's statutory payment timetable provides an outline for the required timing of payments on construction projects in South Carolina, it does not lessen the impact of S.C. Code Ann. § 29-6-20's requirement that "[p]erformance by a contractor or subcontractor in accordance with the provisions of his contract entitles him to payment from the party with whom he contracts."⁸ In other words, the timing requirements of S.C. Code Ann. § 29-6-30 only apply when a payment from the owner is actually made. However, regardless of whether payment is made by the owner, S.C. Code Ann. § 29-6-30 requires a contractor to pay its subcontractors for work properly performed. In 2000, the Legislature enacted the Subcontractors' and Suppliers' Payment Protection Act, which removes all doubt as to whether pay-if-paid provisions are enforceable in South Carolina. The Subcontractors' and Suppliers' Payment Protection Act is discussed more below.

Finally, S.C. Code Ann. § 29-6-40 (2021) provides, "[n]othing in this chapter requires that payments due a contractor from an owner be paid any more frequently than as set forth in the construction documents, nor shall anything in this chapter affect the terms of any agreement between the owner and any lender."⁹This provision, like much of the chapter, has not received any judicial treatment or interpretation. However, it appears to take into account that, on most projects, payment applications are submitted monthly. This provision appears to guard against a contractor citing the statute for the proposition that he could submit those payment applications more frequently than the monthly provisions of the contract and expect payment within 21 days. However, this is not clear.

While the chapter does allow the parties to contract around S.C. Code Ann. § 29-6-30's timing requirements, it is not something that can be done surreptitiously.¹⁰ The statute provides, "[n]othing in this chapter shall prohibit owners, contractors, and subcontractors, on private construction projects only, from agreeing by contract to . . . payment periods different from those stipulated in this section, and in this event, these contractual provisions shall control."¹¹ However, in order for the waiver to be effective, the section must be "specifically waived, by section number, in conspicuous bold-faced or underlined type."¹² If the statutory provisions are not strictly followed, the waiver would thus be ineffective.

The latter part of S.C. Code Ann. § 29-6-40 (2021) is aimed at lenders and appears to be an attempt by the Legislature to make it clear that lenders are not being forced to approve draw requests, or take any other action, sooner than their loan documents with their lenders (often the owner) require, despite the payment timing provisions that govern the owner, contractor, and subcontractor relationships.¹³

3. Justifications for Withholding Payment

As inferred from the above-cited statutes, the contractor or subcontractor must perform his or her work in accordance with the terms of the contract in order to be entitled to payment. S.C. Code Ann. § 29-6-40 makes this clear when it states:

Nothing in this chapter prevents the owner, the contractor, or a subcontractor from withholding application and certification for payment because of the following: unsatisfactory job progress, defective construction not remedied, disputed work, third party claims filed or reasonable evidence that claim will be filed, failure of contractor or subcontractor to make timely payments for labor, equipment, and materials, damage to owner, contractor, or another subcontractor, reasonable evidence that contract or subcontract cannot be completed for the unpaid balance of the contract or subcontract sum, or a reasonable amount for retainage.¹⁴

Though this provision is rather self-explanatory, it certainly sets forth bases upon which an owner, contractor, or subcontractor can validly withhold payment.

4. Interest on Late Payments

When an owner, contractor, or subcontractor fails to comply with the statutory timetable for payments and the parties have not waived those requirements, "the owner, contractor, or subcontractor shall pay his contractor or subcontractor interest, beginning on the due date, at the rate of one percent a month or a pro rata fraction thereof on the unpaid balance as may be due."¹⁵ "However, no interest is due unless the person being charged interest has been notified of the provisions of this section at the time request for payment is made."¹⁶ "[O]wners, contractors, and subcontractors, on private construction projects only, [may] agree[] by contract to rates of interest . . . different from those stipulated in [S.C. Code § 29-6-50 (2021)], and in this event, these contractual provisions shall control, provided the requirements of [S.C. Code Ann. §§ 29-6-30 and 29-6-50 (2021)] are specifically waived, by section number, in conspicuous bold-faced or underlined type."¹⁷...