Posted on February 09, 2015
Every contractor, subcontractor, and material supplier in the State of Ohio has at least some knowledge of the Prompt Pay Act (“Act”), often just enough to get themselves into trouble. The Act, codified in section 4113.61 of the Revised Code, establishes clear deadlines within which subcontractors and materialmen must be paid. Specifically, the Act requires that subcontractors and materialmen 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 Act within thirty days, the subcontractor or materialman may file suit to recover the original amount owed, plus the interest and attorneys’ fees. Although the Act 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.
The recent decision in Frank Novak & Sons, Inc. v. A-Team, LLC, 2014-Ohio-922, demonstrates how a payment dispute can turn from bad to worse to disastrous by miscalculating the merits of a defense to a PPA claim. A-Team was the general contractor hired to perform restoration work at FirstEnergy Stadium in Cleveland, after is sustained water damage from defective plumbing and heavy thunderstorms. Novak was a subcontractor retained by A-Team to do painting, flooring and wall covering work.
It was unclear whether Novak had a written or oral contract for its work, or whether Novak had two contracts or just one. Ultimately, Novak had to perform additional work, later arguing that it was never paid for this work. A-Team contended that Novak only had one contract for which it was actually overpaid. Following a trial, the court sided with A-Team, holding that it had a good-faith basis to withhold payment. The appeals court disagreed, however, determining that A-Team did not have a justification for withholding payment from Novak, and therefore had violated the Act. The appeals court further held that was liable to Novak for the amount owed, plus 18% interest. Because the legal battle had been raging for more than six years, the interest had ballooned to more than the amount which was initially in dispute.
That wasn’t the worst of it though for A-Team, because the appeals court held that the trial court still needed to determine whether Novak was entitled to attorney’s fees. Given that the case had dragged on for more than half a decade, through a trial and an appeal, the amount of attorneys’ fees which A-Team could be liable for are likely several times its original exposure.
As demonstrated by the Novak case, violations of the Act can result in severe penalties for contractors that roll the dice withholding payment from their subs. Evaluating both claims and defenses under the Act 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 Todd Harpst or Nick Horrigan, at Harpst Ross, Ltd. – Business Lawyers for the Construction Industry®, at (330) 983-9971 or firstname.lastname@example.org or email@example.com.
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