SC Lawyer, September 2012, #2. You Can't Rob Peter to Pay Paul.

• Author: By Joshua D. Spencer

South Carolina BAR Journal

2012.

SC Lawyer, September 2012, #2.

You Can't Rob Peter to Pay Paul

South Carolina LawyerSeptember 2012You Can't Rob Peter to Pay Paul South Carolina's Statutory Payment Protections in Construction ProjectsBy Joshua D. SpencerAt its essence, the story is familiar. Woody Cash is an inexperienced developer who acquired land to build a 24-unit luxury condominium project at Lake Jocassee (Project).

Cash obtained construction financing through Jocassee National Bank (JNB) and hired Topflight Construction from Asheville to build the Project. Topflight has projects ongoing in both Carolinas on which it uses the same key subcontractors. Topflight's subcontracts with all its subcontractors contain "pay-if-paid" provisions that make payment to each subcontractor by Topflight contingent upon payment by the owner to Topflight for that subcontractor's work. The subcontracts allow Topflight to withhold payment up to 30 days after it receives payment for the subcontractor's work from the owner, even if there is no dispute over the subcontractor's work. Topflight uses one bank account to pay its subcontractors for all projects.

Cash did not consult an attorney prior to entering into the contract with Topflight. He signed a heavily modified AlA (American Institute of Architects) A101 with modified AlA A201 General Conditions, without knowing what changes Topflight made to these widely used form contracts. Cash has no idea what kind of payment arrangements Topflight has with its subcontractors. Cash convinced JNB not to require payment and performance bonds on the Project to avoid paying the required premium.

The Project, which has a 12-month schedule, went well at first. However, about four months in, subcontractors began approaching Cash during his site visits complaining Topflight had not paid them. They threatened to walk off the job and file mechanic's liens if Cash did not pay them directly. Obviously concerned, Cash approached Topflight's superintendent, Joe. Joe apologized and said that Topflight was having problems on its Hilton Head project because the owner there had refused to pay for more than two months. Despite being upside down, Topflight had continued to work and required the same of the subcontractors working on Cash's Project. Joe told Cash he thought Topflight was using Cash's money to pay for other projects.

Irate, Cash called Topflight's project manager, Pete, and demanded answers. Pete told Cash that Joe liked to exaggerate, and that the reason the subcontractors had not been paid on Cash's project was that work from each of them had failed an inspection on the Hilton Head project. Cash vociferously complained that he had been told nothing about any subcontractor's defective work on his Project or any other, and that Topflight had no right to hold his Project up even if the subcontractors were having problems elsewhere, if that was even true. Cash then went to see his Walhalla lawyer and asked whether he had any legal protection. Those protections are the subject of this article.

south Carolina's statutory -yment protections

South Carolina has several statutory provisions related to construction project payments. These statutes set up a timetable for payments; 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; outlaw pay-if-paid provisions; make it a criminal act to misappropriate funds paid to a contractor or subcontractor for that contractor's or subcontractor's laborers, subcontractors and suppliers; and set up a process for recovery of attorney's fees and interest related to unpaid amounts. See S.C. Code Ann. 27-1-15, et seq. (2011) (this statutory provision allows recovery of attorney's fees in some circumstances, but will not be discussed in detail in this article). These statutes are designed to prevent wrongdoing in the construction payment process, particularly by those who have received monies intended to pay for someone else's work.

Payments to contractors, subcontractors and suppliers

Pay-if-paid provisions unenforceable

In 1990, the...