August 2007 Issue
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Indiana’s Prompt Payment Act
Indiana Supreme Court Addresses Entitlement To Maintain A Performance Bond Claim On Title 8 Projects.
Recent Case Notes
Indiana’s Prompt Payment Act
By Nathan A. Leach
Nathan concentrates his practice in construction law and litigation and commercial litigation and business litigation.
On any large public or private construction project, it is imperative that the general contractor receive “timely” payment from the owner so that it, in turn, has sufficient cash flow to make “timely” payments downstream to its subcontractors. Although receiving timely payments is important to every contractor on both public and private projects for cash flow purposes, for the general contractor working on public projects in the State of Indiana, making timely payments downstream is important to prevent subcontractors and suppliers from filing claims with the owner which will have the effect of impounding contract funds or potentially involving the general contractor’s surety. Unfortunately, unless the contract documents define the time frame in which payment must be made, whether or not payment is “timely” can be fruitful grounds for disputes between an owner and general contractor.
At least for public projects in the state of Indiana, the Indiana Legislature removed any doubt as to when a payment is “timely” when it enacted Indiana’s Prompt Payment Act (“PPA”). In fact, the PPA has created substantial protection against late payment on public works projects in the State of Indiana for both general contractors and subcontractors alike.
Under the Prompt Payment Act, which applies to all contracts for public works in the State of Indiana in excess of $100,000, payment from a state agency or political subdivision is timely if: (1) payment is mailed or delivered on the date specified for the amount specified in the applicable contract documents, or, if no date is specified, within thirty-five (35) days of receipt of the goods and services or receipt of a properly completed claim; or (2) if any amount is required to be withheld under state or federal law, payment is mailed or delivered in the proper amount on the date the amount may be released under the applicable law. Ind. Code § 5-17-5-1(b); Ind. Code § 5-16-5.5-2. If the claim must be approved by a local legislative body and there is no date for payment specified in the contract documents, payment is timely if the political subdivision pays the claim within thirty-five (35) days following the first regularly scheduled meeting of the body or board receiving the claim so long as such a meeting is held within ten (10) days after the body or board receives the claim. Ind. Code § 5-17-5-1(c).
The statutes definition of “timely” is critical because payment not made to the general contractor within the time indicated in the contract documents, or within the default period of 35 days from receipt of a properly completed claim, carries potentially substantial penalties to the owner. Specifically, every state agency and political subdivision shall pay a late payment penalty at a rate of one percent (1%) per month on amounts due on written contracts for public works. Ind. Code § 5-17-5-1(a). This mandatory late payment penalty provides a strong deterrent for state agencies and political subdivisions to unjustifiably withhold payment and consequently helps to ensure that general contractors receive timely payment.
However, as noted above, the PPA also provides security to subcontractors on public works projects in the State of Indiana. Specifically, when a contractor is unable to make timely payments to a subcontractor because the state agency or political subdivision failed to make timely payments, the contractor is required to pay interest to its subcontractor at the rate of one percent (1%) per month on the amount due the subcontractor after the contractor receives payment and any penalty payment. Any interest that remains unpaid to the subcontractor after the thirty (30) days has lapsed is added to the principal amount owing on the contract and interest subsequently accrues on the aggregate of the principal and unpaid interest. Ind. Code § 5-17-5-4. Further, the general contractor must make payment to its subcontractor within ten (10) days of receipt of payment from the state agency or political subdivision. Ind. Code § 5-16-5.5-5.
There are, however, a few exemptions provided to the state agency or political subdivision before it will incur the late payment penalty. First, the amount in the general contractor’s claim must be “due.” In other words, the general contractor must have fulfilled its contractual obligations. Similarly, the late payment penalty does not apply when there is a “good faith dispute” over the claim and the state agency provides notice to the general contractor of the dispute prior to the date that payment must be made to be considered timely (i.e., within 35 days after receiving the claim unless the contract documents provide otherwise). Pursuant to the PPA, the state agency’s notice of the dispute must be sent by certified mail, personal delivery or in accordance with the terms of the contract documents.
Because whether or not a dispute is in “good faith” may be somewhat amorphous, the PPA fortunately defines this crucial term. Specifically, “good faith dispute” means a “contention by the state or political subdivision that goods delivered or services rendered were either: 1) not in accordance with the quantity or quality specified in the contract documents; 2) faulty; or 3) installed improperly. Ind. Code § 5-17-5-2(b). In addition to these types of potential “good faith disputes,” the PPA leaves the door open for state agencies by providing that a good faith dispute may exist for any other reason giving cause for the withholding of payment until such dispute is settled. Id. In addition to the “good faith dispute” exemption, the late payment penalty does not apply to Indiana Department of Transportation (“INDOT”) contracts that permit partial progress payments when each payment does not exceed five hundred dollars ($500). Ind. Code § 5-17-5-2(a)(5). Lastly, the PPA does not apply to any public works contracts funded exclusively with federal funds. Ind. Code § 5-17-5-2(a)(6).
Besides the above noted exceptions, the PPA applies to all written contracts for public works in the state of Indiana even though the PPA is only found in Title 5 of the Indiana Code (which solely governs contracts for public works executed by state agencies) because the PPA’s plain terms broadly indicate that it governs all written contracts executed by every state agency and political subdivision. Ind. Code § 5-17-5-1(a). See also Ind. Code § 4-1-4-1 (defining “political subdivision” as “any county, township, city, and town.”); and Ind. Code § 5-16-5.5-1 (defining “state agency” as “the state of Indiana or any commission or agency created by law). As a result, the provisions in the PPA provide general contractors and, derivatively, subcontractors substantial protection against late payment on all written contracts for public works in the State of Indiana in excess of $100,000 (including Title 36 local government contracts, Title 4 Department of Administration contracts, Title 5 state agency contracts and Title 8 INDOT contracts, except those INDOT contracts discussed above). See Ind. Code § 5-16-5.5-2.
If you have any questions regarding this article or related matters, please contact Nathan A. Leach at (317)580-4848 or nleach@drewrysimmons.com.
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Indiana Supreme Court Addresses Entitlement To Maintain A Performance Bond Claim On Title 8 Projects
By Kim Cohen
Kim concentrates her practice in construction law and litigation, commercial and business litigation, public contract law, and surety law.
There is a restricted class of claimants who may bring claims against the statutory bonds required on public works projects. While this class has not always been clearly defined, the Indiana Supreme Court has recently drawn a bright line establishing which claimants may bring performance bond claims under Indiana Code § 8-23-9-9 (“Title 8”). Alberici Constructors, Inc. v. Ohio Farmers Ins. Co., 866 N.E.2d 740, 741 (Ind. 2007) (“Alberici”).
In Alberici, the Indiana Department of Transportation (“INDOT”) entered into a contract with Primco, Inc. (“Primco”) to perform work on two bridges. As required by Title 8, Primco obtained a performance bond on the project. Primco subsequently entered into a contract with Harmon Steel (“Harmon”) for the purchase of a pre-fabricated steel bridge. Harmon in turn contracted with Gateway Bridge, LLC (“Gateway”) for the material, who in turn issued a purchase order for the fabrication of the bridge to Alberici Constructors (“Alberici”). Gateway failed to pay Alberici, and Alberici brought a claim against Primco’s performance bond.
Projects awarded by INDOT require that the performance bond contain language on a specified form requiring the principal to “promptly pay all debts incurred by the principal or any subcontractor in the construction of the work, including labor, service and materials furnished.” Ind. Code § 8-23-9-12. Based on the foregoing language, the Court found that the bond protects all entities that are in privity of contract with either the contractor or subcontractor. Id. at 741. Accordingly, the definition of “subcontractor” was essential in determining whether Alberici could be a claimant under the bond.
In determining the definition of “subcontractor”, the Court turned to Title 4 (Ind. Code § 4-13.6-7-6) for guidance. Title 4 governs surety bonds on state construction projects. The definition of “subcontractor” in Title 4 requires that the claimant be in direct privity with the contractor and excludes persons who solely deliver materials. Ind. Code § 4-13.6-1-18.
The Court next considered cases interpreting the Miller Act, which lays out the surety bond requirements for certain federal public works projects. In Clifford F. MacEvoy Co. v. United State ex rel. Calvin Tomkins Co., 322 U.S. 102, 107-11 (1944) (“MacEvoy”), the United States Supreme Court interpreted the Miller Act as limiting bond coverage to parties who deal directly with the contractor or a subcontractor. In that case, the Court found that because the claimant had contracted with a first-tier material supplier, as opposed to a subcontractor, the claimant was not entitled to recover under the bond. MacEvoy, 322 U.S. at 108-11.
Based on the foregoing, the court in Alberici determined that a “subcontractor” under Title 8 is “any person or organization entering into a contract with a contractor to furnish labor and materials used in the actual construction of a state highway project. A pure material supplier or laborer is not a subcontractor.” Id. at 746-47 (emphasis added). Therefore, a subcontractor is one who both (a) is in privity with the contractor and (b) furnishes labor and materials on the project. Accordingly, because Alberici had not contracted with a subcontractor on the project, it was too far removed to bring a claim against Primco’s performance bond.
If you have any questions regarding these cases or related matters, please contact Kim Cohen at (317) 580-4848 or email her at kcohen@drewrysimmons.com.
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Recent Case Notes
By Scott P. Fisher
Construction Law
Hartford Cas. Ins. Co. v. Evansville Vanderburgh Public Library,
860 N.E.2d 636 (Ind. Ct. App. 2007)
After contractor damaged a building during excavation processes, the Library sued Hartford alleging breach of contract and seeking indemnification. The Court of Appeals held that, under the efficient proximate cause rule and as a matter of first impression, where a peril specifically insured against sets other causes into motion which, in an unbroken sequence, produce the result for which recovery is sought, the loss is covered, even though other events within the chain of causation are excluded from coverage.
Blakley Corp. v. EFCO Corp., 853 N.E.2d 998 (Ind. Ct. App. 2006)
The Court of Appeals affirmed the trial court’s decision awarding damages to Blakley, a subcontractor on the Indiana State Museum project. EFCO, a curtain wall manufacturer, argued that the trial court could not rely on Federal law as it was not binding precedent, but since “no Indiana case adequately addressed the issues,” decisions of other jurisdictions were instructive. The Court of Appeals also refused to award Blakley twenty-five percent markup on its costs because Blakley failed to clearly define overhead costs from profit.
Labor and Employment Law
Naugle v. Beech Grove City Schools, 2007 WL 1229333 (Ind. April 27, 2007)
The Indiana Supreme Court reversed the Court of Appeals decision relating to the Indiana Wage Payment Statute. The Supreme Court held that the term “days” as used in the Wage Payment Statute refers to business days rather than calendar days.
The Court further held that there is no generic “good-faith” defense to the Wage Payment Statute. The plain language of the statute and the public policy of ensuring that employees receive their pay in a timely fashion and in the correct amount dictate that an employer cannot rely on its good-faith belief of disputed rights to wage payments in withholding wages due.
Finally, the Court also held that there is no implicit requirement that an employee demand or request the receipt of wages within ten days of the date wages are earned before the penalty provisions of the Statute are triggered. Rather, the Statute supplies the maximum time limit within which employees must be paid after the end of the pay period.
Glenn v. Dow Agrosciences, LLC, 861 N.E.2d 1 (Ind. Ct. App. 2007)
The Court of Appeals held a non-competition agreement was overly broad in scope and was against public policy. Indiana’s three prong approach to non-competition agreements requires the Court to analyze 1) whether the employer has a legitimate interest; 2) the scope of the restriction; 3) and public policy. Even though Dow had a strong interest in its trade secrets, the agreement was void as against public policy and because it lacked any geographic boundary.
If you have any questions regarding these cases or related matters, please contact Scott P. Fisher at (317) 580-4848 or email him at sfisher@drewrysimmons.com.