New court ruling changes Payment Act interpretation

For Missouri contractors, owners and subcontractors, this could require a change in the way payments are structured in construction contracts on private projects.

The subcontractor case

In the case of Vance Brothers Inc. v. Obermiller Construction Service Inc., the

Court of Appeals reviewed a claim by a subcontractor against a general contractor for nonpayment.

The subcontractor was applying microsurfacing to various Wal-Mart parking lots pursuant to a lump-sum contract, which paid the subcontractor only upon the completion of the work. A dispute arose concerning the quality of the work provided. The general contractor thought the work was substandard and withheld the payment from the subcontractor.

In response, the subcontractor filed suit alleging various theories and causes of action, including a claim for attorneys’ fees and increased interest under the Missouri Private Prompt Payment Act.

Private Prompt Payment Act

The Court of Appeals rejected the Private Prompt Payment Act claim by noting that the act applies only to contracts for private design or construction work that involve “scheduled payments pursuant to the terms of the contract.” Because the contract at issue involved only one lump-sum payment rather than progressive or scheduled payments, the court concluded that the act was not applicable and, accordingly, denied the claim for attorneys’ fees and increased interest.

Also, the court ruled that, if the Private Prompt Payment Act had been applicable, the general contractor was not entitled to withhold payment even under “good faith.” In a narrow ruling, the court distinguished the Missouri Public Prompt Payment Act with the Private Prompt Payment Act by recognizing that the Public Prompt Payment Act includes an express statutory provision entitling a contracting party to withhold payment in good faith.

Because the Private Prompt Payment Act does not include such a provision, the court ruled that the good-faith requirement cannot be “read into” the law.

The decision is not clear as to whether the contract at issue involved an express provision entitling the other party to withhold payment for the good faith belief of improper or late work. As such, this decision – which is the subject of an appeal to the Missouri Supreme Court – casts doubt on the viability of a contract provision for withholding.

Payment schedule

In light of this decision, if a party is interested in keeping the Private Prompt Payment Act applicable, the party should make sure that more than one payment is scheduled in the contract.

This may be awkward on short-term contracts.

However, adding an initial or interim payment for a scheduled date increases the likelihood that the Private Prompt Payment Act will apply.

Attorney Lee Poppen practices construction law in the Springfield office of Lathrop & Gage, and attorney Sherman Botts leads Lathrop & Gage’s construction practice.