Almost every state, including Washington (as well as Alaska and Oregon), now has some form of prompt payment regulation in their statutory scheme.[i] These laws obligate owners and contractors to pay invoices within a specific time frame or face interest on their debt and in many instances attorneys’ fees. These laws were created in an effort to provide protection against nonpayment to contractors and subcontractors.
In Washington, when a public body wishes to withhold payment for unsatisfactory performance, or if the payment request does not comply with the contracted amount, the public entity must notify the prime contractor within eight working days of the defective performance. After the contractor satisfactorily completes the actions described in the notice, the public body must pay within 30 calendar days. If payment is not received in that time, interest will begin accruing at a rate of 1% per month.[ii] In the event of a dispute over the unpaid sums, the prevailing party is awarded attorneys’ fees.[iii] This legislation is beneficial to contractors, who have the leverage of interest accrual to entice payment by the public entities that hired them.
Unlike in many states, where the prompt payment laws apply to contracts across the board, Washington’s prompt payment statute does not apply to private contracts. Compare Vermont’s Prompt Payment Act, which operates similarly to Washington’s except that it applies to both public and private contracts.[iv] The Vermont Supreme Court has read this legislation to require owners and contractors to pay all undisputed amounts of invoices up front, and only allow contractors and owners to withhold the amount that is in dispute that exceeds the agreed contract price.[v]
Although Washington’s legislation is not as broad as Vermont’s, Washington contractors in the private sphere may not be entirely without a remedy. In 2006, the Washington Court of Appeals, Division I, held that progress payments from an owner to a general contractor, when based on standard form contracts like AIA, act as a “trust fund” for the benefit of the subcontractor.[vi] Effectively, the Court’s decision makes using those funds for payments on other debts a “tortious conversion.”
In Westview Investments, Ltd.,[vii] a general contractor kept funds designated in subcontracts in an account with the same bank that financed the project. The bank used those funds to offset payments they were owed by the general contractor on other projects and other debts. The court found that this was unfair to the subcontractors to whom the money was owed because the banks had sufficient knowledge about the projects (enough to know that those funds may be for the purpose of a trust to pay the subcontractors).
In essence, the Court found that banks may be liable for misappropriating trust funds when they use these funds to pay down the borrower’s debt to the bank before paying subcontractors who performed work on the project. Although this case was a big win for subcontractors, it is a narrow holding. Without a legislative prompt payment mandate for private contracts, Washington contractors must still work within limited judicial opportunities to demand payment for their work.
Comment: For more information and background on the Washington Prompt Payment Act, see Ahlers & Cressman blog article Unbalanced Bids – Hidden Dangers. Oregon’s Prompt Payment Act pertains to private contracts as well as public contracts. Washington and Alaska’s Prompt Payment Acts only applied to public works projects. Washington does not have a trust fund statute, however, it appears that, at least as to this one case, the Court of Appeals was willing to impose a trust on the funds received by a bank and did not permit the bank to offset debts of the general contractor from the funds that had been earned by subcontractors for that particular project. Under this narrow holding, the burden to convince a court to impose a trust on funds earned by general contractor is a steep one.
[i] Eckert Seamans Cherin Mellott, LLC, Fifty State Survey of Prompt Payment Acts for Construction Contracts, (April 10, 2012), available at http://www.eckertseamans.com/file/pdf/alerts/PromptPaymentActManual0412.pdf.
[ii] RCW 39.76.011
[iii] RCW 39.76.040
[iv] 9 V.S.A. 4007
[v] Dorr v. LaCoste, 2013 WL 2924160 (Vt. June 12, 2013) (Unpublished Opinion).
[vi] Westview Investments, Ltd. v. U.S. Bank Nat. Ass’n, 133 Wn. App. 835, 845, 138 P.3d 638 (2006).