Getting Paid On Time: The Prompt Pay Act

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Contractors in Maryland have available statutory remedies for non-payment.  The Maryland Code contains a Prompt Pay Act (the “Act”). Md. Code Ann., Real Prop. § 9-301 et seq. (Repl. Vol. 2010). The Act entitles a contractor or subcontractor that performs work or furnishes materials for a property under a “contract” to prompt payment.  The Act is a corollary to Maryland’s mechanic’s lien law.  The Act requires payments from an “owner” of “undisputed amounts owed under a written contract” within thirty days after the occupancy permit is granted or the owner takes possession of the property or within seven days of the date required for payment under the written contract.  If the contract is not with an “owner,” payment must be made to contractors or subcontractors within seven days “after receipt by the contractor or subcontractor of each payment received for its subcontractors’ work or materials.”  Under the Act, the “undisputed amount” is defined as “an amount owed on a contract for which there is no good faith dispute, including any retainage withheld.”  What constitutes “good faith” is undefined in the Act, but likely relates to the validity of the disputed amounts or whether the monies were withheld for an improper purpose.

The Act does permit an owner or contractor to withhold “retention proceeds” if called for in the parties’ written agreement.  This exception for retainage would only apply to contracted amounts over $250,000.

The importance of the Prompt Pay Act is that it provides a mechanism for the recovery of attorney’s fees, interest and costs on the outstanding amounts.  The Act provides: “If a court determines that an owner, contractor, or subcontractor has acted in bad faith by failing to pay any undisputed amounts owed as required under [the Act], the court may award to the prevailing party reasonable attorney’s fees.”  The Act also permits the Court to allow for an injunction to prevent future violations.

The Act is subject to a number of exceptions.  The Prompt Pay Act does not apply to: a) a contract for the construction and sale of a single family residential dwelling; b) any transaction under the Custom Home Protection Act; or c) a home improvement contract by a contractor licensed under the Maryland Home Improvement Law.

If applicable, the Prompt Pay Act can provide a means to recover the attorney’s fees and cost of collection that may not otherwise be available in a breach of contract action where fees and costs are not addressed in the parties’ agreement.

Topics:  Attorney's Fees, Construction Contracts, Construction Industry, Contractors, New Legislation, Payment Schedules, Subcontractors

Published In: Civil Remedies Updates, Construction Updates, Residential Real Estate Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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