by John W. Rourke¹ and Charles A. Gentry²

Contractors frequently encounter problems in obtaining timely payments from construction project owners for the work they have done. Likewise, whether due to the contractors' own problems in obtaining payment or due to other factors, subcontractors and suppliers often face delays in obtaining timely payments from upper tier contractors or subcontractors for the work that they have done. In response to this problem, both Missouri and the United States have enacted "prompt payment" laws. This article addresses the major points of, and issues pertaining to, those laws. As the laws are fairly technical, the practitioner should review the laws themselves to become fully aware of their implications.

I. State Prompt Payment Statutes

A. Public Works Prompt Payment Statute

Missouri's public works prompt payment law, § 34.057, RSMo,³ provides substantial protection to general contractors, subcontractors and suppliers involved in public construction contracts in Missouri by requiring prompt payment and by placing limits on the amount of retainage that can be withheld from payments due. Section 34.057 requires public owners to make payment, less retainage not to exceed five percent (and, in some cases, 10 percent), "within thirty days following the latter of:" "(a) [t]he date of delivery of materials or construction services;" (b) the date of delivery of the invoice; or "(c) [i]n those instances in which the contractor approves the public owner's estimate, the date upon which such notice of approval is duly delivered." Final payment is due upon the earliest of completion of the project or certification by the owner or the owner's duly authorized representative that the project has been completed and filing of "all required documentation and certifications."⁴

If the owner fails to pay the contractor within 30 days, it is required to pay the contractor, in addition to the payment due it, interest of one and one-half percent per month.⁵ Upon receipt of payment from the owner, the contractor, for its part, is required to make payment to its subcontractors and suppliers "within fifteen days after receipt of payment" by the owner or be subject to the same statutory interest penalty unless it has "reasonable cause" for withholding payment.⁶ "If the contractor receives less than the full payment" from the owner, it must disburse those funds on a pro rata basis to its subcontractors and suppliers who did the work in question, unless a particular subcontractor or supplier is responsible for a specific portion of the work being rejected by the owner, in which case payment to such subcontractor and supplier can be withheld and the "other subcontractors and suppliers . . . paid in full."⁷

Pursuant to the statute, the owner may withhold payment from a general contractor—and a contractor or subcontractor may withhold a payment application or certification for work done by a subcontractor or sub-subcontractor—for a variety of reasons, including but not limited to: "unsatisfactory job progress; defective construction work or material not remedied; disputed work; failure to comply with any material provision of the contract; third party claims filed or reasonable evidence that a claim will be filed; failure [of the subcontractor] to make timely payments for labor, equipment or materials; damage to a contractor, subcontractor or material supplier; [and] reasonable evidence" that the contract cannot be completed "for the unpaid balance of the contract."⁸ In addition, the statute allows the owner to withhold payment if the contractor is cited by an "enforcing authority for acts . . . which do not comply with any material provision of the contract and which result in a violation of any federal, state or local law [or] regulation . . . causing additional costs or damages to the owner."⁹

As long as payments "are withheld in good faith for reasonable cause" based upon the reasons cited above or other reasons, "no late payment interest shall be due and owing."¹⁰ If, however, the court determines that the payment "was not withheld in good faith for reasonable cause," it "may impose interest at the rate of one and one-half percent per month," i.e. 18 percent plus reasonable attorney's fees.¹¹

The reported cases involving § 34.057 are City of Independence v. Kerr Construction Paving Co.,¹² Essex Contracting, Inc. v. City of DeSoto,¹³ and EPIC, Inc. v. City of Kansas City.¹⁴

City of Independence, in particular, is Missouri's leading public works "Prompt Pay Statute" case, both for its interpretation of the statute in general and for its holding that a payment bond surety would not be liable to a subcontractor for interest and attorney's fees under § 34.057.¹⁵ In City of Independence, a sodding subcontractor brought an action against a general contractor and its surety. The subcontractor sought to recover $3,430 in damages for breach of contract, plus interest of $926. In addition, the subcontractor sought to recover, under the prompt payment act, penal interest of $2,066 plus attorney's fees of $20,000. The court held the general contractor and its surety "jointly and severally liable for" the breach of "contract damages" plus the "non-penal interest" that had accrued.¹⁶ However, the court refused to hold the surety liable for that portion of the judgment containing the penal interest and attorney's fee amounts, i.e. the prompt payment act penalties. In its decision, the court distinguished another Missouri case, City of Kansas City ex rel. Jennings v. Integon Indem. Corp.,¹⁷ on the ground that the bonded contracts in City of Kansas City expressly required the principal to pay the prevailing wage, so that the "bond covered that specific statutory requirement."¹⁸ The court further distinguished City of Kansas City by pointing out that the surety law recited in that case was "of a general nature" and that the surety did not provide any support for non-liability in that case.¹⁹ The City of Independence court also found persuasive the fact that: (1) "Section 34.057 does not contain a requirement of a bond to insure prompt payment;" (2) § 34.057 does not mention bonds or sureties; and (3) the statute requiring a bond, § 107.170,²⁰ cannot "be read to require that any other statutory section be made an automatic part of the bond."²¹ Consequently, the court stated that it was "not persuaded that [the surety should] be deemed to have had" the prompt payment statute "in contemplation when the contract was executed," and thus would not hold the surety responsible for the penal interest and attorney's fees.²²

The recent case of Environmental Protection, Inspection, Consulting, Inc. (EPIC) v. City of Kansas City creates a legal paradox for a contractor.²³ In 1992, EPIC was hired by the City of Kansas City to construct a spillway for a lake at the Kansas City Zoo. After construction began, EPIC encountered an old roadway left behind by the city during 1990 construction. It was discovered that the old roadway and surrounding sediment were contaminated with toxic chemicals. The city knew of the submerged road's existence, but failed to mention the fact in the bidding materials. In addition, EPIC claimed that the old roadway acted as a conduit for storm water into the construction site. Unfortunately, as a result, construction costs were dramatically increased. EPIC attempted to bill the increased costs to the city through change orders. However, the city refused the requested change orders and withheld payment for alleged deficient work and delays. EPIC filed suit under theories of breach of contract, negligent maintenance and the public works prompt payment law.²⁴ The jury found in favor of EPIC on all claims, and awarded actual damages plus $454,572 in prompt payment interest penalties. The trial court subsequently granted the city's motion for judgment notwithstanding the verdict regarding the penalties. Both parties appealed.

The Missouri Court of Appeals, Western District, affirmed the trial court's decision to take away the prompt payment interest, holding that EPIC failed to submit to the city a final invoice regarding the disputed change orders and other appropriate documentation and certifications as required by the "Prompt Payment Statute."²⁵ Although the court acknowledged that the "Prompt Payment Statute" is remedial in nature, thereby requiring a liberal interpretation to impose late payment interest when bad faith is found, the court determined that there is no wiggle room to submit a claim to the finder of fact if the contractor did not comply with § 34.057.1(8) regarding the submission of required documents to the city.²⁶ The due date for "Prompt Payment Statute" liability is not triggered until the submission of required documents.²⁷ Interest does not begin to run under the law until the due date is triggered.²⁸

The irony of the court's decision required EPIC to submit an invoice to the city for disputed change orders to trigger the prompt payment law penalties. However, the municipal contract entered into between the city and EPIC did not allow the submission of disputed change orders in the final invoice. Thus, if EPIC included the disputed change orders in its final invoice, it arguably would be in breach of the contract. Since EPIC complied with the terms of the contract with the city, but failed to follow the apparent strict guidelines of the law, it was precluded, according to the court, from submitting its prompt payment claim to the jury. Therefore, the EPIC case suggests contractors must include all payments requested, both disputed and undisputed, in their final invoice to the owner, along with other documentation required by the law to ensure prompt payment law compliance.

B. Other Public Payment Statutes

In addition to the public works prompt payment law, the construction lawyer or professional should be aware of two additional statutes regulating payment on public contracts. The first, § 34.055,²⁹ applies to the State of Missouri and regulates the interest or late charges that may be assessed against the state. That statute, "[e]xcept as otherwise provided in section 34.057," subjects the state to interest or late charges for late payments to its vendors for supplies and services purchased by the state. The second statute, § 34.058,³⁰ voids "no damage for delay" clauses in all public works prime contracts except for contracts with the Missouri highway and transportation department. The effect of this statute is to prevent the affected governmental entity from including in its prime contract a provision that prevents the general contractor from recovering additional costs or damages due to delays caused by the governmental entity.

C. Missouri's Private Prompt Payment Statute

In 1995, Missouri enacted § 431.180.³¹ That statute, as amended in 1999, requires "[a]ll persons who enter into a contract for private design or construction work . . . [to] make all scheduled payments" pursuant to the terms of the contract.³² Although the statute specifically excludes work on "owner-occupied residential property of four units or less,"³³ it includes contracts for the "design, construction, alteration, repair or maintenance of any building, roadway or other structure or improvement to real property, or demolition or excavation connected therewith, and shall include the furnishing of surveying, architectural, engineering or landscape design, planning or management services, labor or materials, in connection with such work."³⁴ Pursuant to the statute, a person failing to make scheduled payments pursuant to the terms of the contract may be held liable by a court or arbitrator, "in addition to any other award for damages," for "interest at the rate of up to one and one-half percent per month from the date payment was due pursuant to the terms of the contract, and reasonable attorney fees, to the prevailing party."³⁵

Although it is significantly less detailed than the public works prompt payment law, § 431.180 also provides for interest of up to 18 percent per annum plus attorney's fees against a party that fails to pay as scheduled. Rather than setting a stated period for when the prompt payment interest begins to accrue (such as 30 days after payment is due pursuant to § 34.057), § 431.180 starts such interest "from the date payment was due" under the contract. Finally, unlike § 34.057,

§ 431.180 does not include any provisions justifying a party from withholding payment. Although there are no reported cases on point, it is likely that a court will read in such justification by allowing a party to withhold payment under the grounds that payment was not due since the party seeking payment did not perform "pursuant to the terms of the contract."³⁶ With that said, the party to a private construction contract that withholds payment under the mistaken, even if reasonable, belief that it was justified in doing so risks penalties and attorney's fees since § 431.180 does not include an explicit provision (like that found in § 34.057) allowing withholding of payment "in good faith for reasonable cause."³⁷ Hence, although a court still has discretion in that it may, but need not, award penalties and interest under the private prompt payment law, there certainly appears to be less wiggle room than in the public statute, where the withholding party can claim that it withheld payment "in good faith for reasonable cause."³⁸ This is true even if the party is ultimately wrong about this.

II. The Federal Prompt Payment Act

The construction lawyer should also be generally aware of the federal prompt payment act,³⁹ which applies to all federal government contracts for property or service and provides that payment is due on the date specified in the contract⁴⁰ or, in the event the contract does not provide a date for payment, "30 days after a proper invoice for the amount due as received if a specific payment date is not established by contract."⁴¹ With respect to general construction contracts, the federal act requires the government to make payment within 14 days after an approved progress payment request is received or a longer period if established in the contract.⁴² Like the Missouri statutes, the act also requires that prime contractors make timely payments to subcontractors who, in turn, must make timely payments to their subcontractors and vendors.⁴³

The requirement for prompt payments under the federal act, like the Missouri public statute, is subject to numerous exceptions. For example, the time for payment is tolled if a dispute exists between the agency and the contractor "over the amount of payment or compliance with the contract."⁴⁴ Moreover, the clock begins ticking for the government to make prompt payment only when it receives a "proper invoice" or request for progress payments.⁴⁵

III. Conclusion

In sum, notwithstanding the defenses and limitations that they inherently contain, the Missouri and federal prompt payment acts provide contractors, subcontractors and suppliers strong recourse against upper-tier parties that wrongfully withhold payment, provided the statutory requirements are met.

Endnotes

¹ John W. Rourke is a shareholder and principal in the St. Louis law firm of Reinert & Rourke, P.C. His practice emphasizes fidelity and surety bond claims and litigation, construction litigation, and commercial law. He is a graduate of the University of Virginia and the University of Missouri School of Law. Mr. Rourke is licensed to practice law in Missouri, Illinois and a number of federal courts. He is a member of the American Bar Association, The Missouri Bar, the Illinois State Bar Association, the Chicago Bar Association, and the Bar Association of Metropolitan St. Louis. He has been a contributor to, or co-author of, a number of papers and publications pertaining to fidelity law, surety law and construction law.

² Charles A. "Chip" Gentry is a shareholder and principal in the Jefferson City law firm of Carson & Coil, P.C. He engages in construction litigation, real estate litigation, insurance defense and personal injury litigation. He obtained his bachelor's degree and his juris doctorate degree from the University of Missouri-Columbia. Mr. Gentry is licensed to practice law in Missouri and the United States District Court, Western District of Missouri. He is a member of the American Bar Association (Construction, Litigation, and Tort and Insurance Practice Committees), the Cole County Bar, The Missouri Bar (Construction, Real Estate, Tort and Insurance Committees), and the Missouri Association of Trial Attorneys. Mr. Gentry has successfully litigated, arbitrated, and/or settled numerous construction-related matters.

³ Section 34.057, RSMo 2000.

⁴ Section 34.057.1(8), RSMo 2000.

⁵ Section 34.057.1(5), RSMo 2000.

⁶ Section 34.057.1(7), RSMo 2000.

⁷ Section 34.057.1(6), RSMo 2000.

⁸ Section 34.057.5, RSMo 2000.

⁹ Id.

¹⁰ Section 34.057.6, RSMo 2000.

¹¹ Id.

¹² 957 S.W.2d 315 (Mo. App. W.D. 1997).

¹³ 815 S.W.2d 135 (Mo. App. E.D. 1991).

¹⁴ 37 S.W.3d 360 (Mo. App. W.D. 2000). EPIC is the acronym for Environmental Protection, Inspection, Consulting.

¹⁵ There are currently bills before the Missouri legislature that seek to make a surety liable for prompt payment penalties.

¹⁶ City of Independence v. Kerr Constr. Paving Co., 957 S.W.2d 315 (Mo. App. E.D. 1997).

¹⁷ 857 S.W.2d 233 (Mo. App. W.D. 1993) (wherein the court had awarded the prevailing wage statutory penalty of double the wages due plus attorney's fees against a surety company).

¹⁸ City of Independence, 957 S.W.2d at 324.

¹⁹ Id.

²⁰ Id.

²¹ Id. at 325.

²² Id.

²³ 37 S.W.3d 360 (Mo. App. W.D. 2000).

²⁴ Section 34.057, RSMo 2000.

²⁵ 37 S.W.3d 360 at 372.

²⁶ Id. at 370.

²⁷ Id.

²⁸ Id.

²⁹ Section 34.055, RSMo 2000.

³⁰ Section 34.058, RSMo 2000.

³¹ Section 431.180, RSMo 2000.

³² Section 431.180.1, RSMo 2000.

³³ Section 431.180.2, RSMo 2000.

³⁴ Section 431.180.4, RSMo 2000.

³⁵ Section 431.180.2, RSMo 2000.

³⁶ Section 431.180.1, RSMo 2000.

³⁷ See 34.057, RSMo 2000.

³⁸ Id.

³⁹ 31 U.S.C. §§ 3902 et seq. (2001).

⁴⁰ 31 U.S.C. § 3903(a)(1)(A)(2001).

⁴¹ 31 U.S.C. § 3903(a)(1)(B) (2001).

⁴² 31 U.S.C. § 3903(a)(6)(A) (2001).

⁴³ 31 U.S.C. § 3903(b)(1)(B)(ii) (2001).

⁴⁴ 31 U.S.C. § 3907(c)(2001). See L&A Jackson Enters v. U.S., 38 Fed. Cl. 22, 45 (Fed. Cl. 1997).

⁴⁵ 31 U.S.C. § 3903(a)(1), (a)(6) (2001).