Kentucky’s Fairness in Construction Act, effective July 1, will affect owners, contractors and subcontractors in both the public and private context (excluding residential construction). It is important for those in the construction industry to understand the key changes created by this new legislation. In general, it is favorable to the interests of the construction industry. DBL recently held a breakfast seminar for construction industry professionals. That meeting generated much good discussion, highlighting some areas of uncertainty in interpreting the Act that will have to be worked out over time. Some of the key changes are outlined below.
Impact On Contract Provisions
The Act invalidates certain construction contract provisions, specifically: waiver or release of the right to litigate, waiver of the right to delay damages against the owner, and waiver of the right to file a mechanic’s lien. These provisions are no longer enforceable. The Act also makes all construction contract provisions automatically severable, meaning that one invalid provision of the contract does not invalidate the entire contract.
Impact On Payments
The Act necessitates prompt payment by owners. Owners must pay undisputed amounts to contractors within 30 business days (45 days if the owner is a post secondary institution) after receipt of a timely, properly completed, undisputed request for payment. A 12% rate of interest will apply to any payments made beyond the 30-day limitation. If a payment has not been made in the first 25 days, the contractor has a legal duty to notify the owner by certified mail, noting the date when interest begins to accrue at the 12% rate. Contractors must pay subcontractors undisputed amounts within 15 business days of receipt of payment to the contractor by the owner, with the same 12% interest applying for late payments.
The Act limits the amount of retainage that can be withheld. If less than half of the entire project has been completed, 10% of the contract value can be retained. If the project is more than half completed, only 5% can be retained. Retainage must be released 30 days after “substantial completion” of a project. Substantial completion occurs when all three of the following are met: a) regulatory approvals are obtained, b) warranties and documentation are provided to the owner, and c) the owner is able to occupy and enjoy the space for its intended purposes. However, an owner may still retain 200% of the remaining costs of completion. Contractors then have 15 days to release the retainage to subcontractors in proportional shares.
The Act radically departs from the normal mechanic’s lien rule by extending the deadline for filing a mechanic’s lien. Now, if a contractor or subcontractor receives a judgment against a contracting party, the contractor or subcontractor has 60 days to file a mechanic’s lien (excluding public construction contracts).
Attorneys Fees And Costs
The new legislation provides that prevailing parties in a dispute may recover costs and attorney fees if the adverse party acted in “bad faith.” However, for public contracts, the standard contract rules for attorney fees remain applicable. In summary, the prompt pay, retainage and mechanic’s lien provisions of the Act do much to improve a contractor’s ability to obtain prompt payment and to protect against non-payment through use of a mechanic’s lien.