HOUSE BILL NO. 5375
January 22, 2020, Introduced by Reps. Elder,
Sneller, Stone, Sowerby, Haadsma, Kuppa, Marino, Brenda Carter, Garza,
Liberati, Hood, Hammoud, Tate, Kennedy, Cambensy, Bellino, Manoogian, Sabo,
Peterson and Love and referred to the Committee on Commerce and Tourism.
the people of the state of michigan enact:
Sec. 1. This act shall be known and may be cited as the "construction payment act".
(a) "Billing period" means the payment cycle agreed to by the parties, or, absent an agreement, the calendar month within which the work is performed.
(b) "Construction project" means any improvement, renovation, addition, or development to real property.
(c) "Contract" means a contract, including any and all additions to, deletions from, and amendments to the contract, of whatever nature, to provide improvements to real property.
(d) "Contractor" includes, but is not limited to, an architect, engineer, general contractor, construction manager, subcontractor, lower-tiered subcontractors, supplier, or other person, that enters into a contract to furnish services, labor, or materials in connection with the erection, construction, completion, alteration, or repair of a building, or a commercial project that provides actual improvement to real property.
(e) "Court" means a district or circuit court of this state subject to venue and jurisdictional requirements.
(f) "General contractor" means a contractor who contracts with an owner or lessee to provide, directly or indirectly, through contracts with subcontractors, suppliers, or laborers, improvements to real property described in a notice of commencement recorded under section 108 of the constructions lien act, 1980 PA 497, MCL 570.1108.
(g) "Improvement" means the result of services, labor, or a use of material or equipment provided under a contract by a contractor, subcontractor, supplier, or laborer. Services, labor, and material or equipment include, but are not limited to, surveying, engineering and architectural planning, construction management, clearing, demolishing, excavating, filling, building, erecting, constructing, altering, repairing, ornamenting, landscaping, and paving; rental equipment, prefabricated materials, or components stored on or off site; or installing or affixing a fixture or material. Material does not include stock material stored off site.
(h) "Laborer" means an individual who, under a contract with a contractor, provides an improvement to real property through the individual's personal labor.
(i) "Money or funds" includes, but is not limited to, all money or funds due a contractor, supplier, or laborer in connection with a contract for the erection, construction, completion, alteration, or repair of a building or an addition to a building, or, as applicable, other construction project or development.
(j) "Owner" means a person, or a person's agent, that has an interest in the land or premises upon which a contractor has undertaken to erect, construct, complete, alter, or repair a building or an addition to a building, or, as applicable, other construction project or development.
(k) "Person" means an individual or a corporation, partnership, limited liability company, association, or other legal entity.
(l) "Subcontractor" means a person that enters into a contract to furnish labor or materials to a contractor.
(m) "Supplier" means a person that enters into a contract to supply materials, rental equipment, prefabricated materials, or components, which by their use or incorporation into a project improves real property.
Sec. 3. (1) A construction contract awarded by an owner to a contractor shall include all of the following:
(a) A payment clause that obligates the owner to pay the contractor for satisfactory performance under the contract within 30 days from the end of the billing period.
(b) A statement that the owner has sufficient funds or financing in place as of the effective date of the contract to complete the scope of work identified in the contract.
(c) An interest clause that obligates the owner to pay the contractor interest on wrongfully withheld amounts due, equal to 12% per annum, on each payment not made in accordance with the contract's payment clause. The interest shall apply to the period beginning on the day after the required date of payment and ending on the date on which payment of the amount due is made. Any interest that remains unpaid at the end of a 30-day payment period shall be added to the principal amount of the debt, and interest penalties shall accrue on the added amount.
(2) The requirement under subsection (1) to include a contract provision as described in that subsection does not impair the right of an owner to include in the contract a provision that permits the owner to withhold, as a result of unsatisfactory or incomplete performance by the contractor, or in relation to a dispute regarding the scope of the contracted work, a specified percentage of a progress payment, or the entire payment, that is otherwise due without incurring an obligation to pay interest on the amount withheld if the amount withheld bears a reasonable relationship to the value of the claim or dispute.
(3) If an owner withholds a specified percentage of a progress payment, or the entire payment, under a contract provision described in subsection (2), the owner shall provide to the contractor within 10 days of receiving the invoice disputed by the owner a written or electronic notice stating the reasons for withholding the specified percentage or entire payment.
(4) If after 30 days following the issuance of the notice described in subsection (3) the owner and contractor are unable to come to an agreement regarding the disputed payment, the owner shall deposit the specified percentage of the payment withheld, or the entire payment, into a verifiable and federally insured interest-bearing bank account or credit union account created for the subject project. The owner shall provide verification of the deposit to the contractor within 10 days of receiving from the contractor a written or electronic notice requesting verification. The deposited money must remain in the account until the owner and contractor resolve their dispute or a court of competent jurisdiction or arbitrator orders the deposited funds to be disbursed, including the manner of that disbursement.
(5) If a court of competent jurisdiction or arbitrator determines that a payment withheld under a contract provision described in subsection (2) was not withheld in good faith for reasonable cause, the court or arbitrator may award reasonable attorney fees to the prevailing party.
(6) In a civil action or arbitration brought under this section, if the court or arbitrator determines after a hearing that the cause was initiated, a defense was asserted, a motion was filed, or any other proceeding related to the civil action or arbitration was done frivolously or in bad faith, the court or arbitrator shall order the party that initiated the cause, asserted the defense, filed the motion, or caused the proceeding to be held, to pay the other party named in the action the costs attributable to those actions and the reasonable expenses incurred by that party, including reasonable attorney fees.
(7) If an owner has made payment of an amount withheld under this section to the contractor according to the payment terms of the construction contract, or the provisions of this section, future claims for the withheld amount against the owner by the contractor are barred.
Sec. 4. (1) A construction contract awarded by a contractor to a subcontractor or supplier shall include all of the following:
(a) A payment clause that obligates the contractor to pay the subcontractor and each supplier for satisfactory performance under the contract within 7 calendar days of the contract's completion and that the payment must be made from the amount paid to the contractor.
(b) An interest clause that obligates the contractor to pay the subcontractor or supplier interest on wrongfully withheld amounts due, equal to 12% per annum, on each payment not made in accordance with the contract's payment clause. The interest shall apply to the period beginning on the day after the required date of payment and ending on the date on which payment of the amount due is made. Any interest which remains unpaid at the end of a 30-day payment period shall be added to the principal amount of the debt, and interest penalties shall accrue on the added amount.
(2) The requirement under subsection (1) to include a contract provision as described in that subsection does not impair the right of a contractor to include in the contract a provision that permits the contractor to withhold, as a result of unsatisfactory performance or delays by the subcontractor or supplier, or in relation to a dispute regarding the scope of the contracted work, a specified percentage of a progress payment, or the entire payment, that is otherwise due without incurring an obligation to pay interest on the amount withheld if the amount withheld bears a reasonable relationship to the value of the claim or dispute.
(3) If a contractor withholds a specified percentage of a progress payment, or the entire payment, under a contract provision described in subsection (2), the owner must provide to the contractor within 10 days of receiving the invoice disputed by the contractor a written or electronic notice stating the reasons for withholding the specified percentage or entire payment.
(4) If after 30 days following the issuance of the notice described in subsection (3) the contractor and subcontractor or supplier are unable to come to an agreement regarding the disputed payment, the contractor shall deposit the specified percentage of the payment withheld, or the entire payment, into a verifiable and federally insured interest-bearing bank account or credit union account created for the subject project. The contractor shall provide verification of the deposit to the subcontractor or supplier within 10 days of receiving from the subcontractor or supplier a written or electronic notice requesting verification. The deposited money must remain in the account until the contractor and subcontractor or supplier resolve their dispute or a court of competent jurisdiction or arbitrator orders the deposited funds to be disbursed, including the manner of that disbursement.
(5) If a court of competent jurisdiction or arbitrator determines that a payment withheld under a contract provision described in subsection (2) was not withheld in good faith for reasonable cause, the court or arbitrator may award reasonable attorney fees to the prevailing party.
(6) In a civil action or arbitration brought under this section, if the court or arbitrator determines after a hearing that the cause was initiated, a defense was asserted, a motion was filed, or any other proceeding related to the civil action or arbitration was done frivolously or in bad faith, the court or arbitrator shall order the party that initiated the cause, asserted the defense, filed the motion, or caused the proceeding to be held, to pay the other party named in the action the costs attributable to those actions and the reasonable expenses incurred by the party, including reasonable attorney fees.
(7) If a contractor has made payment of an amount withheld under this section to the subcontractor or supplier according to the payment terms of the construction contract or the provisions of this section, future claims for the withheld amount against the contractor or any surety of the contractor from the subcontractor or supplier on the subject project are barred.
Sec. 5. (1) An owner shall pay a contractor strictly in accordance with the terms of their contract.
(2) If the terms of a contract between an owner and a contractor do not contain a term governing payment, the contractor may submit to the owner, for payment at the end of the billing period, an invoice for 1 or more of the following:
(a) Work already commenced but not fully completed if the invoiced work will be completed by the end of the billing period.
(b) Materials already supplied to the project.
(3) If a contract between an owner and a contractor does not contain a provision governing when an invoice may be submitted, a contractor may submit either a partial invoice every 30 days for payment for work performed or a final invoice when the agreed-upon work is fully completed. The owner shall pay all undisputed amounts owed to the contractor within 30 days after the end of the billing period or 30 days after delivery of the invoice by the contractor, whichever is later. An owner shall not retain under this subsection a specified percentage of a progress payment or final payment otherwise due a contractor, subcontractor, or supplier for the purpose of ensuring satisfactory performance under the contract.
(4) If payment terms are not specified in a contract between a general contractor and a subcontractor or supplier, the general contractor shall pay all undisputed amounts owed to its subcontractors or suppliers within 7 days after receipt of payment by the general contractor for the subcontractor's work or the supplier's materials.
(5) If payment terms are not specified in a contract between a subcontractor and its subcontractors or suppliers, the subcontractor shall pay all undisputed amounts owed to its subcontractors or suppliers within 7 days after receipt of payment by the subcontractor for the work of its subcontractors or its suppliers' materials.
Sec. 6. (1) An owner shall not withhold a specified percentage of a progress payment or final payment otherwise due a contractor, subcontractor, or supplier upon satisfactory performance under the contract.
(2) A general contractor or a subcontractor, or their agents, shall not withhold a specified percentage of a progress payment or final payment otherwise due to a subcontractor, supplier, lower-tiered subcontractor, or lower-tiered supplier upon satisfactory performance under the contract.
Sec. 7. A provision in a contract for a construction project that includes 1 or more of the following is against public policy and is void and unenforceable:
(a) A requirement that a contractor assume the risk of nonpayment of the owner.
(b) A requirement that a contractor waive a statutory or other right to commence litigation or arbitration until payment is made to the general contractor.
(c) A requirement that makes the obligation of a contractor and its surety to provide a payment to a claimant, under a payment or performance bond, subject to payment by the contractee.
(d) A requirement that a contractor rely on the credit of the owner and not on the credit of the general contractor or a bonding company.
(e) A requirement that a dispute or claim arising from a construction project located in this state between the contractor and a subcontractor or supplier be governed or subject to the laws of a state other than this state or require litigation, arbitration, mediation, or other dispute resolution processes to occur in a state other than this state.
(f) A requirement that a contractor waive a provision of this act.
Sec. 8. (1) This act does not apply to any of the following:
(a) Public works contracts.
(b) Residential contracts for the erection, alteration, or repair of a single residential dwelling, attached multiple residential dwellings less than 7 units, detached condominiums, site condominiums, or premises used or intended to be used for residential purposes and related facilities appurtenant to the premises that are used or intended to be used as an adjunct or residential occupancy.
(2) The burden of proving an exemption from this act is upon the person claiming the exemption.
(3) This act applies to private commercial construction projects, including, but not limited to, apartment buildings, lofts, motels, hotels, office buildings, medical buildings, retail buildings, industrial buildings, shopping malls, parking structures, storage buildings, barns, mixed residential and commercial use buildings, private schools, restaurants, churches, places of worship, and related facilities, fixtures, and structures appurtenant to the premises.
Sec. 9. If an owner or contractor disputes an amount stated in an invoice for payment, all of the following apply:
(a) The party disputing the invoice shall notify the other party in writing within 10 days of the receipt of the invoice.
(b) The party disputing the invoice shall in the notice specifically describe in detail those items in the invoice that are disputed.
(c) If a notice of dispute is not given within the time required by this section, the invoice is considered accepted as submitted.
(d) If a notice of dispute is not given within the time required by this section, the lack of notice does not constitute acceptance of the work performed.
Sec. 10. (1) If arbitration or litigation is commenced to recover payment due under sections 3, 4, or 5 and it is determined that the owner, contractor, or subcontractor has failed to comply with the payment terms required under section 3 or 4, the court or arbitrator shall award damages equal to the amount determined by the court or arbitrator to have been wrongfully withheld. An amount is not wrongfully withheld if it bears a reasonable relationship to the value of a disputed amount or claim held in good faith by the owner, contractor, or subcontractor against whom the contractor or subcontractor is seeking to recover payment.
(2) Absent any agreement to the contrary between the parties, the court or arbitrator in an arbitration proceeding arising under this act shall award to the substantially prevailing party its reasonable attorney fees, arbitration costs, and expenses for expert witnesses.