More than twenty new laws came into effect in early July, including updates and additions to the Prompt Pay Act. The Prompt Pay Act is a Tennessee state statutory compilation that governs many aspects of construction projects. The Act governs payment disputes between owners, prime contractors and subcontractors. Essentially, if you work in the industry, you should familiarize yourself with this law.
The Act provides that after successful completion of the project, the owner or prime contractor needs to pay the prime contractor or subcontractor within ninety days, including the held retainage. The retainage is a percentage of the project cost that is set aside in escrow. Once the owner pays, the Act provides for a form release that protects both parties by confirming that the work was successfully completed and full payment was made.
If the payment is not timely made, which the Act provides that payment can be withheld if done within the terms of the contract between the parties, the Act provides a form of notice that the prime contractor or sub can provide to the owner or prime contractor providing its intent to seek equitable relief under the Act. At this stage, the responding party has ten days either to pay the bill or provide adequate legal reasoning for withholding payment.
If a party withholds payment, the unpaid party may demand reasonable assurances from the non-paying party. The Act provides for a form demand for reasonable assurances of adequate financing. The non-paying party then is required to provide sufficient evidence that it secured the required financing to fulfill its payment obligations under the contract.
The Act also provides for procedures to solve a dispute regarding construction defects. The Act provides for notice of the defect to be given, followed by an optional inspection and response. The parties may settle the dispute by correcting the defect or with a settlement payment. If the parties do not resolve the dispute following the guidelines of the Act, legal action may be commenced.