Contractors and subcontractors in Illinois were recently equipped with a new legal tool to encourage timely payments from upstream parties.  Earlier this year, the Illinois General Assembly passed the Contractor Prompt Payment Act, Public Act 95-0567, which became effective for contracts entered on or after August 31, 2007.  The Contractor Prompt Payment Act (the “Act”) provides deadlines for approval and payment of pay applications for (1) contractors seeking payment from owners; and (2) subcontractors seeking payment from contractors and penalties for non-compliance.

For contractors seeking payment from owners, the Act provides that an owner shall pay the contractor within 15 calendar days from the date of the owner’s approval of the contractor’s pay application.  It further provides that a contractor’s pay application will be deemed approved 25 days after of the owner receives the pay application unless, within that 25 day period, the owner submits a written statement to the contractor setting forth the amount withheld and the reasons for withholding.  The owner, however, can only withhold an amount commensurate with the portion of the work that is nonconforming.

For subcontractors seeking payment from contractors, the Act requires a subcontractor to be paid within 15 calendar days of the contractor’s receipt of payment from the owner.  This provision also protects sub-subcontractors, suppliers and other companies that are entitled to mechanics liens under the Mechanics Lien Act.

If an owner or a contractor fails to comply with these deadlines, the claimant is entitled to the unpaid sum in the pay application plus 10% interest per year.  Further, if a contractor or subcontractor is not paid according to the Act, the contractor and subcontractor can, upon 7 days written notice, suspend its performance on the project, without penalty for breach of contract, until payment under the Act is made.

Thus, an owner’s obligations under the Act are to respond in writing within 25 days of receiving a payment application and to pay the contractor within 15 days of approving that application.  The contractor’s obligation is to pay its subcontractors within 15 days of receiving payment from the owner.

The Act raises some significant practice questions.  For instance, we expect that owners will require, in the prime contracts that, contractors waive their rights under the Act.  Whether courts will permit a waiver of the provisions of the Act is unknown.  If a contractor waives its rights under the Act the contractor will need to include similar waivers in contracts to downstream parties.

Further complications arise when a construction project involves a construction escrow.  A dispute will likely arise as to when and who “approves” a pay application for purposes of the Act.  The owner’s approval could occur when it submits an owner’s sworn statement to the title company listing the amount to be paid to the contractor.  In such a case, a title company may have difficulties reviewing pay applications and disbursing funds within 15 days from the date of the owner’s sworn statement.  Moreover, whether a title company’s acceptance and disbursement of a pay application triggers the 15 days limitation and binds the owner is also a concern.

Rather than comply with the restrictions in the Act, upstream parties may issue blanket or routine withholding notices to downstream parties to allow sufficient time for pay application review, approval and disbursement.  Because the Act provides no standards to govern the legitimacy of the reasons given by the upstream party, such subversive practices could avoid the consequences of the Act.

Contractors and subcontractors have been granted a new tool to expedite payments on private projects.  Contractors must pay subcontractors (and subcontractors must pay suppliers and second tier subcontractors) within 15 days of receiving payments.  If an upstream contractor decides not to release funds to the downstream party, the upstream contractor must seriously consider returning those funds to the owner.  Even though downstream contractors are given a right to stop work, those contractors should be certain that a violation of the Act has occurred before pulling off because if no violation has occurred, the downstream contractor will likely be in breach of the contract if it ceases its operations.

Ogletree Deakins’ Construction Industry Group will continue to keep its clients apprised of significant developments to the Contractor Prompt Payment Act.

 

Note: This article was published in the October 25, 2007 issue of the Construction eAuthority.


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