Construction Law

A Contractor Must Pay a Subcontractor All Undisputed Amounts Due

By Ryan McCabe

            A contractor did not meet the requirements of the Texas Prompt Payment Act when the contractor wrongly withheld undisputed amounts owed to the subcontractor. ARCO Construction Company, Inc. v. Americon Services Company, Inc., 2008 WL 2058214 (Tex. App. 2008). The contractor conditioned paying the undisputed amounts upon the subcontractor?s release of claims to the disputed amounts.

            Americon Services Company (Americon), the subcontractor, sued the contractor ARCO Construction Company, Inc. (ARCO) for not paying for work completed on a project. A jury awarded Americon $61,000, finding that ARCO violated the Texas Prompt Payment Act (TPPA). The court also excused Americon for its breach of contract. ARCO appealed.

            The first issue on appeal was whether TPPA applied to ARCO where ARCO had unresolved claims against Americon. ARCO argued that TPPA applied to undisputed debts only. The court noted that the purpose of the statute was to accelerate payment to contractors and subcontractors. Also, the language of the TPPA required that a contractor who received payment from an owner pay the subcontractor promptly, unless there was a dispute concerning the amount owed for subcontractor?s work. The court, therefore, rejected ARCO?s argument that the statute did not apply. Instead, TPPA allowed ARCO to withhold funds totaling the unresolved claims against Americon.

            ARCO then argued that it fully complied with the TPPA requirements. The court, however, noted that ARCO had to pay to Americon all undisputed funds. ARCO did send Americon a check. Instead, ARCO conditioned the release of funds on Americon admitting that the payment was in full satisfaction of ARCO?s obligation. The court held that a contractor did not meet the TPPA requirements when the contractor would only pay the subcontractor the undisputed amounts if the subcontractor agreed to release all claims to the disputed amounts.

            As to the disputed funds, ARCO argued that the sum it withheld was the subject of a good faith dispute. Americon had admitted that it owed attorney?s fees to ARCO under an indemnification provision in the contract. However, the jury found that ARCO withheld more than a good faith dispute would call for. The court concluded that ARCO did not comply with TPPA: ARCO withheld more than 100% of the disputed funds because at the time of the trial ARCO still had not paid any of the undisputed funds.

            Next the court considered whether the trial court erred in rejecting the jury?s damages award to ARCO for Americon?s breach. The court pointed out that the jury never awarded damages but just found that Americon failed to comply with the indemnification provisions of the contract. ARCO argued that substantial performance by Americon could not be a defense to a breach of contract action. The court disagreed and held that Americon?s substantial compliance was a total defense to an award for attorney?s fees under the indemnification provision. ARCO, therefore, was not entitled to damages.

            Lastly, the court dismissed the other issues raised by ARCO regarding attorney?s fees, finding that ARCO was not entitled to attorney?s fees because it did not prevail on its breach of contract claim.

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Full post as published by The South Carolina Construction Law Blog on February 06, 2009 (boomark / email).