Equity in Construction Contracts

This bill requires private sector contracts for building large, new commercial or industrial buildings to contain specific provisions, including ones for arbitration and mediation, to ensure prompt payment of general contractors and subcontractors. It applies to contracts worth $250,000 or more entered into on or after October 1, 1998, between a property owner and a general contractor, a general contractor and a subcontractor, or between subcontractors. “Owner” means the owner of the real property on which the building is constructed. The law does not apply to public works or other building contracts entered into by any state, the U.S. government, a municipality, or any other political subdivision.

In addition, the bill (1) prohibits building officials from issuing final certificates of occupancy for these buildings if notified of a payment dispute unless the owner has the type of contract qualifying him for an exclusion, (2) places monetary and time limits on retainage owners impose on general contractors, (3) allows contractors to stop working and remove unused materials from the worksite without liability if they are not paid in a timely fashion, (4) establishes a way for owners to pay subcontractors directly and meet the bill's requirements, (5) prohibits parties to construction contracts from waiving certain of the bill's provisions, and (6) makes its provisions severable if certain of its provisions are ruled invalid.

REQUIRED CONTRACT PROVISIONS

Under the bill, each such contract must include the following requirements.

1. Disputes between the parties over payment must be submitted to arbitration within 30 days after the payment due date specified in the contract. The arbitration requirement does not apply if the parties mutually resolve their dispute, submit it to mediation, or agree to take it to court before the end of the 30-day period.

2. Arbitration must proceed according to applicable laws and the rules of the dispute resolution entity the parties agree to use. If they cannot agree on an entity, the rules of the American Arbitration Association apply.

3. Arbitration fees and reasonable attorney's fees incurred from arbitration must be paid as directed by the arbitrators, except that surety companies cannot be obligated to pay arbitrator's fees, attorney's fees, or interest on amounts ordered paid by an arbitrator.

4. If the parties submit the dispute to mediation before arbitration, mediation must proceed according to the rules of the American Arbitration Association.

5. An owner, general contractor, or subcontractor must pay 10% annual interest on any amount the arbitrator finds he owes to a contractor, starting from the payment due date specified in the contract.

6. A general contractor must pay a subcontractor, and a subcontractor must pay any other subcontractor, for satisfactory work by a mutually agreed-upon date that cannot be more than 60 days after final payment is received from the owner or general contractor.

APPEALS OF ARBITRATION DECISION

The bill authorizes either party to appeal a construction contract arbitration proceeding to the Superior Court for the district in which either party lives or has a principal place of business. An appellant must file a demand for trial within 20 days of the arbitrator's decision. The arbitrator's factual findings are admissible unless the court (1) determines that they are unsupported by substantial evidence in the record; (2) determines that the arbitrator acted arbitrarily or capriciously in the course of the hearings; or (3) finds that there are defects which, under arbitration law, requires a judge to vacate, modify, or correct the decision. If the arbitrator's findings are admissible, they are presumed to be correct unless rebutted by a preponderance of evidence.

A judge must vacate an arbitrator's award if (1) it was procured by corruption, fraud, or undue means; (2) there has been evident partiality or corruption by the arbitrator; (3) the arbitrator was guilty of misconduct in (a) refusing to postpone a hearing on sufficient cause, (b) refusing to hear pertinent and material evidence, or (c) taking an action prejudicing the rights of a party; or (4) an arbitrator exceeded his authority or exercised it so imperfectly that a mutual, final, and definite award was not made.

A judge may modify or correct an arbitrator's award if (1) there has been an evident material miscalculation, (2) the award was on a matter that was not submitted, or (3) the award is imperfect in form in a way that does not affect the merits of the dispute.

Either party may seek an order to vacate, modify, or correct an award in accordance with the bill and arbitration law if a demand for a new trial is not filed within 20 days.

If the court finds that the appellant appealed without good cause, it may grant costs and reasonable attorney's fees to the prevailing party.

CERTIFICATES OF OCCUPANCY

The bill overrides special acts and local ordinances and prohibits local building officials from issuing final certificates of occupancy (CO) for commercial or industrial buildings that receive a building permit on or after October 1, 1998, if the officials have received a written notice of dispute stating that an owner or general contractor has not paid some or all of the money owed under a construction contract. After the local building official receives such a notice, the bill requires him to issue a CO for an otherwise eligible building when he receives (1) a written notice signed by the parties declaring that the party owing the money has placed that amount in an interest-bearing escrow bank account in this state; (2) a copy of a court order or decision concerning the dispute; (3) a written notice signed by both parties stating that the dispute has been submitted to arbitration or an affidavit to that effect signed by one and certified under the penalties for perjury; (4) written notice signed by both parties agreeing that the certificate should be issued; (5) if the owner is a public utility or its subsidiary or affiliate, a certification from the secretary of the state stating that the utility has a combined paid-in capital and surplus of at least $500,000; or (6) an affidavit signed by an owner certifying under penalties for perjury that he is entitled to a CO because he has taken steps to exclude himself.

The bill states that it is not to be construed to (1) impose liability on a municipality or building official for actions taken or not taken concerning its CO requirements or (2) prohibit issuing a temporary CO.

1. The owner must allow the general contractor to give the owner's business or residential address to subcontractors for notice purposes and allow subcontractors to give the address to any other subcontractor for the same purpose. A post office box address does not satisfy this requirement.

2. The general contractor must give the address to a subcontractor when the contract is signed.

3. The subcontractor must give the address to other subcontractors when the contract is signed.

4. The subcontractors must give the owner written notice, by registered or certified mail sent to the supplied address, (a) of the subcontractor's name and business address, (b) that the subcontractor is supplying materials or services in the construction of a commercial or industrial building on the owner's property, and (c) of the type and contract price of the materials or services being provided. The subcontractor's notice must be given within five days after the subcontractor begins to supply materials or services.

RETAINAGE LIMITS

The bill prohibits contracts from allowing an owner to (1) hold back from the general contractor as retainage more than 5% of the payment owed or (2) withhold the retainage for more than 60 days after all the work to be performed under a contract has been completed.

REMOVING CONSTRUCTION MATERIALS

The bill allows general contractors or subcontractors, if they have not been paid within 15 days after making a written payment request on or after the contractual payment due date, to stop working and remove from the worksite all the materials they have supplied if they have not been used or incorporated into the project and have not been billed or paid for. It immunizes contractors taking such an action from liability for damages under the contract caused by any resulting delay in completing the project to the extent the delay is directly related to a contractor's action. A contractor must return the materials and resume working within 15 days after receiving full payment of all amounts due.

PAYMENTS MADE BY AN OWNER TO A SUBCONTRACTOR

A payment made directly to a subcontractor by an owner of an amount owed to the subcontractor by a general contractor is deemed to have been paid to the general for purposes of complying with the bill's provisions on contract requirements, meeting payment date obligations, and issuing a certificate of occupancy, if (1) the amount is not more than the amount the general contractor owes the subcontractor, (2) the general contractor did not pay the subcontractor when required in the construction contract, and (3) the owner gives written notice to the general contractor that the payment is being made.

WAIVER OF RIGHTS PROHIBITED

The bill prohibits construction contract parties from waiving, whether as part of a construction contract, by conduct, or by other agreement, the bill's provisions on covered parties and contracts, contract requirements, retainage limits, the right to stop working and remove materials, or direct payments by owners to subcontractors.

SEVERABILITY

The bill specifies that if any of its provisions or clauses, except the certificate of occupancy lien provision, are found by a court to be invalid or unenforceable, the others remain unaffected and, to this end, are severable. The severability provision does not include the CO provision.

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