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Ohio Appellate Court Determines Breach Of Contract Does Not Equal Prompt Payment Act Violation

Posted on June 21, 2016

This blog has discussed Ohio’s Prompt Pay Act (“PPA”) and the protections it provides to subcontractors’ and materialmens’ right to be paid for their work before on several occasions. What has never been addressed, by this blog or any court as far as we can tell, is what happens when the parties’ contractual obligations don’t offer as much protection as the PPA.  Specifically, what will control the result: the contract or the law?  Recently Ohio’s First District Court of Appeals gave us an answer in H&H Glass, Inc. v. Empire Bldg. Co., L.L.C., 2016-Ohio-3029, and most subcontractors will not like conclusion the Court reached.

The PPA establishes clear deadlines within which subcontractors and materialmen must be paid, requiring subcontractors and materialmen to be paid within ten calendar days of the contractor receiving payment or retainage from an owner. A contractor who fails to pay within the statutory period is liable for interest payment at 18% on the monies withheld and, if the contractor has not complied with the requirements of the PPA within thirty days, the subcontractor or materialman may file suit to recover the original amount owed, plus the interest and attorneys’ fees.

Important to the Court’s decision in H&H Glass, the PPA allows payment to be withheld in the case of a bona fide dispute.  Relying on this exception can be a risky proposition, as a contractor that ends up on the losing end of a drawn-out legal battle could end up staring at a mountain of interest and legal bills, as the general contractor did in Frank Novak & Sons, Inc. v. A-Team, LLC, 2014-Ohio-922, and got slapped with a huge judgment for interest and attorneys fees.

In H&H Glass, however, the contractor’s reliance on the of a bona fide dispute provisions of the PPA worked in its favor – sort of.  Subcontractor H&H Glass, Inc., (“H&H”) entered into a contract with general contractor Empire Building Co. (“Empire”) to supply materials and services related to the installation windows and door frames on a Cincinnati school. H&H submitted monthly pay applications to Empire, which Empire submitted to the project manager for payment. During the course of the project, there were a number of disputes between H&H and Empire regarding whether H&H had properly billed for work performed, the timeliness of payments from Empire to H&H, and retainage amounts withheld by Empire. Ultimately, H&H walked off of the job and Empire hired another contractor, to complete H&H’s work.

H&H sued Empire for breach of contract and violations of the PPA, asserting that Empire had failed to pay H&H $27,084.80. The trial court determined that Empire had materially breached its contract with H&H by failing to pay in accordance with the contract, and that, following the breach, but that the PPA did not apply to the dispute so H&H was not entitled to an award of interest and attorney’s fees.

On appeal, the First District held that Empire had, in fact, breached the contract by failing to pay H&H in full and in a timely manner. The Court recognized that “Wrongfully and consistently withholding payment of labor costs can fairly be characterized as a breach going to the ‘essence’ of the parties’ agreement.”  Empire failed to promptly pay H&H in accordance with the contract, so that has to be a PPA violation, right?  Apparently not, at least according to the First District.

The Court determined that the breach of contract for non-payment did not necessarily translate to a violation of the PPA. Specifically, the Court held, “Empire’s disputes concerning payment on H&H’s pay applications included disagreements over whether H&H had completed the work billed for, disputes over [withholding of custom] storefront materials, and withholding of monies to cover the costs to hire another subcontractor to complete the work H&H had not. H&H’s ultimate success on its breach-of-contract action did not preclude a finding of a good-faith dispute, rendering the Prompt Pay Act inapplicable.”

The question that the First District did not answer, however, was whether the disputes raised by Empire in defense to H&H’s PPA claim were regarding the work itself. This is important because, the Ohio Supreme Court specifically limited the meaning of “disputed liens or claims” as that phrase is used in the PPA in the case of Masiongale Electrical-Mechanical, Inc. v. Construction One, Inc., 102 Ohio St. 3d 1 (2004).  Specifically, the Ohio Supreme Court conclusively determined that the alleged breaches and anticipated costs did not create “disputed liens or claims involving the work or labor performed or material furnished by the subcontractor,” within the meaning of the PPA.  According to the Ohio Supreme Court, paperwork disputes, e.g. failure to submit lien-waivers, are not valid reasons for a contractor to hold subcontractors money because they do not involve the work.

As demonstrated by the H&H Glass case, even if a general contractor cannot be held liable for violations of the Act, it will still be held to its obligations under the contract.  Evaluating both claims and defenses under the PPA and assessing possible exposure to a PPA claim are undertakings that can, and should, be discussed with experienced legal counsel.  For questions regarding Ohio’s Prompt Pay Act, or any other aspect of Ohio construction law, please contact the attorneys at Harpst Ross, Ltd. – Business Lawyers for the Construction Industry®, at (330) 983-9971.

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