Unless you have valid dispute as a basis to withhold payment, timely pay your subcontractors on Kansas projects or you may owe the subcontractor 18% interest and its attorney's fees.
Recently, the Kansas Court of Appeals, interpreting the Kansas Fairness in Public Construction Contract Act (KFPCA) held a contractor liable for 18% and attorney's fees incurred by a subcontractor for failure to timely pay its subcontractor. VHC Van Hoecke Contracting, Inc. v. Murray & Sons Construction Co., Inc., et al., No. 106,603, 2012 WL 2326027 (Kan.App. June 15, 2012).
The KFPCA (K.S.A. § 16-1901, et. seq. ), requires payment to subcontractors, including retainage, within seven business days of receipt of payment from the owner. Interest and attorney fees will accrue if the contractor fails to pay undisputed amounts.
In Van Hoecke, the contractor waited more than 8 months to pay the subcontractor's retainage. Initially claiming lien waiver deficiencies as justification to withhold payment, the contractor eventually admitted it had the lien waivers. But the contract only required that the subcontractor provide receipts of payments made downstream (no lien waiver requirements). And if receipts were lacking, then the contractor could pay the lower-tier subcontractors/suppliers directly. So lien waivers were neither a legal nor a factual basis to withhold retainage and there was no real "dispute." The court concluded: "[A contractor] can't create a "good-faith dispute" based on its own mishandling of paperwork that wasn't even contractually required." The subcontractor was granted 18% interest from the date retainage was due and its attorney fees allocated to the successful collection claims.
The court also addressed quantum meruit claims for extra work (similar to unjust enrichment claims). Those were outside the contract, unliquidated, and thus not subject to the KFPCA. The court expressed doubts but left open the issue of whether an oral or implied-in-fact contract for extra work could be subject to the KFPCA protections.
Finally, K.S.A. § 16–201 is the general prejudgment interest statute allowing for 10 percent interest on amounts due and unpaid. The court held that only in rare instances will prejudgment interest be awarded for unliquidated amounts like quantum meruit and this was not one of them.
Lesson Learned — timely pay your subcontractors and if payment is withheld because of a dispute, have a cogent and rational basis for the withholding. Otherwise, subcontractors that prevail in collecting their money may be entitled to 18% interest and their attorney fees.
For More Information
If you have any questions regarding the Kansas Fairness in Construction Act and its application to your project, please contact Heber Gonzalez at email@example.com or 816.395.0634, or another member of our team.