Ohio Supreme Court to Interpret Prompt Pay Act
Kegler Brown Construction Newsletter December 1, 2003
Recently, the Ohio Supreme Court heard arguments on a case that will determine the future effectiveness of Ohio's Prompt Pay Act. The Prompt Pay Act assists subcontractors and material suppliers in receiving timely payment for labor, materials, and equipment supplied to a project and includes attorney fees and 18% interest that can be assessed against contractors failing to pay within 10 days of receipt of money from an owner.
The Ohio Supreme Court is considering the case of Masiongale Electrical-Mechanical, Inc. v. Construction One, Inc. from the Franklin County Court of Appeals. In Masiongale, the Supreme Court will evaluate the following statutory provision: "The contractor may reduce the amount paid by any retainage provision contained in the contract, invoice, or purchase order … and may withhold amounts that may be necessary to resolve disputed liens or claims involving the work or labor performed or material furnished by the subcontractor."
The issue is what is a "disputed lien or claim." Subcontractors seek a narrow definition that "disputed lien or claim" means a mechanic's lien on a private commercial project or a claim against the public funds on a public project. This provision allows a contractor to withhold a subcontractor's pay until the subcontractor addresses the outstanding lien or claim from a lower-tier subcontractor or material supplier. Contractors seek a much broader definition of this language to include back charges, delay claims, or claims for defective work. The effectiveness of the Prompt Pay Act may depend on how the Courts define this term.
In Masiongale, the contractor asserted that the Prompt Pay Act allows him to withhold from the subcontractor's pay the necessary funds to resolve other disputes including the cost of bonding off a mechanic's lien and the potential cost of defending the lawsuit out of state.
In evaluating the definition of liens and claims, the Court of Appeals concluded definitively as a matter of law, that the Prompt Pay Act does not allow a withholding for actual or potential litigation costs or for premiums paid to bond off mechanic's liens. The Court explained that a contractor can only withhold pay that "may be necessary to resolve disputed liens or claims involving the work or labor performed." The Court noted that the "intent of the Prompt Payment Act is exactly that—to encourage contractors to promptly pay their subcontractors." The Court added that in recognizing that "disputes do arise over such things as the quality of the work performed or materials used, … the legislature provided for the withholding of amounts related to such disputes." The Court concluded that "the proper interpretation of the statute is that a contractor may withhold amounts that are directly related to alleged faulty work, labor or materials[; however, a]ncillary costs that may arise as a result of such disputes, such as actual or potential litigation costs, cannot be withheld, as these costs are seldom definite and, more often than not (and certainly in the case of potential litigation costs), will greatly exceed the direct amounts disputed."
The Ohio Supreme Court will now decide how narrowly to define this "excuse" for lack of prompt payment.