Contractors May be Entitled to Both Prompt Payment Act Relief and Prejudgment Interest for a Cumulative 24%! 

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John Ahlers | Margarita Kutsin

The Washington Prompt Payment Act, in Ch. 39.76 RCW and in RCW 39.04.250, ensures that contractors and subcontractors are promptly paid for their performance on public works contracts. Where a government entity or a prime contractor wrongfully withholds undisputed amounts due, that government entity or prime contractor must pay interest at a rate of 12% per annum.

Separately, prejudgment interest is awarded “based on the principle that a defendant ‘who retains money which he ought to pay to another should be charged interest upon it.’” Hansen v. Rothaus, 107 Wn.2d 468, 472, 730 P.2d 662 (1986) (quoting Prier v. Refrigeration Eng’g Co., 74 Wn.2d 25, 34, 442 P.2d 621 (1968)).  The purpose is to “compensate the plaintiff for the use value of the money representing liquidated or determinable damages.” Id.

The Prompt Payment Act and prejudgment interest serve distinct purposes. On the one hand, the Prompt Payment Act is intended as a penalty for, or a deterrent to, wrongful withholding of payment, considering that withholding payment in good faith is a defense to imposition of the interest.  See e.g., RCW 39.76.020(4); Elcon Const., Inc. v. Eastern Wash. Univ.  174 Wn.2d 157, 171 n.9, 273 P.3d 965(2012); Scarsella Bros., Inc. v. Flatiron Constr., Inc., No. 78543-5-I, Slip op. at 28-29 (Wash. Ct. App. Sept. 28, 2020) (unpublished), On the other hand, prejudgment interest is compensatory in nature and “is not a penalty imposed on a defendant for wrongdoing nor is its purpose to deter wrongdoing.” Hansen, 74 Wn.2d at 34 (emphasis added).

Given that Prompt Payment Act interest and prejudgment interest have different functions, there may be an occasion where both apply, and both could and should be awarded.  For example, if a government entity withholds payment of liquidated amounts that a court ultimately determines should have been paid, that government entity must pay prejudgment interest regardless of whether the amounts due were subject to a good faith dispute. See e.g., Architectural Woods, Inc. v. State, 92 Wn.2d 521, 526, 598 P.2d 1372 (1979)(holding that where government entities may be sued on contracts, those government entities will be “held to the same responsibilities and liabilities as a contracting individual. This includes liability for prejudgment and postjudgment interest.”). But if that liquidated amount due was also undisputed, and wrongfully withheld, then the government entity should be subject to additional Prompt Payment Act interest.

 Prompt Payment Act interest and prejudgment interest are not mutually exclusive remedies. While the legislature may supersede common law, and thus could theoretically supersede common law prejudgment interest, courts will not “deviate from the common law ‘unless the language of a statute be clear and explicit for this purpose.’” King County v. Vinci Construction Grands Projets/Parsons RCI/Frontier-Kemper, JV, 188 Wn.2d 618, 627-628 398 P.3d 1093 (2017) (internal quotation marks omitted) (quoting Potter v. Wash. State Patrol, 165 Wn.2d 67, 77, 196 P.3d 691 (2008)).

There is no clear and explicit language in the Prompt Payment Act statutes indicating that the legislature intended the Prompt Payment Act interest to supersede or preclude recovery of common law prejudgment interest. To the contrary, the Prompt Payment Act, in RCW 39.04.250(3), specifies that interest permitted under that section is awarded “[i]n addition to all other remedies.” (emphasis added). The 1992 Final Bill Report for Senate Bill 1736, pertaining to the Prompt Payment Act, similarly provides that interest will be set at the highest rate allowed under state usury laws, which is presently 12%, and shall be awarded “[i]n addition to other legal remedies.”

The theory proposed here, that contractors and subcontractors may be entitled to a cumulative 24% interest from prejudgment interest and Prompt Payment Act interest, has not yet been tested.[1] However, a recent decision from the Missouri Court of Appeals comes close. See Penzel Constr. Co., Inc. v. Jackson R-2 Sch. Dist., 635 S.W.3d 109, 140 (Mo. App. E.D. 2021). In Penzel, the trial court imposed a combined per annum interest rate of 27%, which included both prejudgment interest as prescribed under the Prime Contract and Missouri’s Prompt Payment Prejudgment Interest (PPP interest). In affirming the trial court’s award of the combined interest, the appellate court reasoned that there was nothing in the text of the PPP interest statute that suggests PPP interest “voids or supplants” contractually agreed prejudgment interest. Id.

Extending the reasoning of Penzel, there is at least a basis for asserting that contractual prejudgment interest (where applicable) should be awarded in addition to Washington’s Prompt Payment Act interest. Like in Penzel, there is no language in the Prompt Payment Act statutes that suggests or implies that Prompt Payment Act interest voids or supplants contractual prejudgment interest. Extending Penzel even further, an argument could be made that Prompt Payment Act interest does not void or supplant common law prejudgment interest for the same reason. Given the lack of any contrary authority, for the subcontractor or prime contractor owed money on a public works project, there is little to risk and much to gain in asking a court to award both Prompt Payment Act interest and prejudgment interest for a cumulative 24%.

[1] Recently, Scarsella Brothers, Inc., an earthwork subcontractor, argued before Division One of the Washington Court of Appeals that the Prompt Payment Act is not an exclusive remedy for prejudgment interest that would preclude an award of common law prejudgment interest. Scarsella Brothers, slip op. at *22-23. Scarsella Brothers did not argue it should be entitled to a cumulative 24% interest, although the relationship between common law prejudgment interest and the Prompt Payment Act was before a Washington appellate court for what appears to be the first and only time. While the superior court ruled that Prompt Payment Act interest and common law prejudgment interest were exclusive remedies, the Court of Appeals dodged that issue, holding instead that Scarsella Brothers was not entitled to either prejudgment interest or Prompt Payment Act interest.

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