In a recent construction law case decided by the Court of Appeals of Tennessee, Beacon4, LLC v. I & L Investments, LLC, the project Owner was ordered to pay, not only the withheld retainage owed to the Contractor, but also, the Contractor’s attorney’s fees, as well as pre-judgment interest. The case is a good example of the Tennessee Prompt Pay Act achieving its intended purpose — requiring owners to pick up a contractor’s tab for attorney’s fees when they withhold retainage in bad faith and for no legitimate reason other than to pressure the contractor to take less than it is owed or to release lien rights it has for work or materials.
Here are the key facts:
- Contractor entered into a contract for the construction of a building with Owner
- Owner retained Butler, a principal in an architectural firm, to act as construction manager for the Project
- On May 17, 2011 a certificate of occupancy was issued for the building
- On November 11, 2011, counsel for Contractor sent Owner a letter demanding Owner pay the $48,442.77 it was holding in retainage as well as another $120,000 for change order work
- Although Butler responded that the retainage was being withheld because of unresolved deficiencies in site work, he admitted at trial that he never placed any monetary value on any corrective work
- On April 12, 2012, Owner sent a letter to Contractor advising it that it had a “final check” in the amount of $62,297 which was available provided that Contractor (and a subcontractor) executed an “appropriate lien release”
- Contractor filed a lawsuit alleging that it was owed the retainage and that it was entitled to attorney’s fees under the Prompt Pay Act because the retainage had been withheld in bad faith (it also alleged breach of contract for the change order work)
- The trial court found that Contractor was owed the retainage; that Owner had violated the Prompt Pay Act by withholding the retainage in bad faith; that Contractor was entitled to an award of attorney’s fees under the Prompt Pay Act for Owner’s bad faith; and that Owner was responsible for pre-judgment interest at 6% APR
The Court of Appeals (“Court”) affirmed the decision of the trial court that Contractor was entitled to the retainage, that Owner had acted in bad faith under the Prompt Pay Act in withholding payment, and that Owner was liable for attorney’s fees.
The Court observed that, under §66-34-204 of the Tennessee Prompt Pay Act, the retainage had to be paid within 90 days of the issuance of the certificate of occupancy, and that Owner had failed to do that. Owner argued that the 90 period of that statute did not apply because the General Conditions of the contract allowed it to hold the retainage beyond 90 days. The provision of the General Conditions relied upon by Owner allowed it to withhold the retainage until the occurrence of a number of conditions, including Contractor’s execution of documents necessary for “waivers of liens.”
The Court held that Owner could not condition release of the retainage on Contractor’s signing a final release that would have deprived it of its right to pursue payment for the change orders. Secondly, it held that the Tennessee Prompt Pay Act mandated the payment of the retainage within the 90 day period regardless of any “contractual provisions allowing the owner to reasonably withhold a sum.”
The Court agreed with the trial court that the proof established bad faith on the part of the Owner in not paying the retainage. It pointed to a number of factors, including:
- Correspondence from Butler indicating that he knew that there was no basis to withhold the retainage
- The fact that Butler never sought to put any monetary value on any of the corrective work he alleged was necessary
- Butler’s failure to be impartial when the contract provisions required him to be
- Butler’s failure to engage in mediation as required by the contract documents
- Butler’s crude, vulgar and unprofessional language in communicating with Contractor
For Tennessee construction law attorneys as well as contractors, owners, and construction managers, this case is a reminder that the Tennessee Prompt Pay Act can have teeth.