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Contingent Payments and Liens in Tennessee Part 1

Tennessee Senator Jack Johnson is attempting to push through Senate Bill 324 (HB271), which will alter the way payments are processed and enforced in the construction industry. Contractors in the Volunteer State are eager to see how this bill could affect their businesses. 

In this two-part series, a Knoxville construction lien lawyer will detail everything you should know about Senate Bill 324, which plans to eliminate contingent payment provisions, increase the amount of time subcontractors are afforded to file a lien, and lessen the duration of retainage, in addition to other changes. When laws change, compliance is difficult. Consult a Knoxville construction lien lawyer from Cotney Construction Law to stay ahead of the curve and ensure that the success of your business is unimpeded by changing legislation.

Eliminating the “Pay if Paid” Clauses

One of the most drastic changes proposed by Senate Bill 324 is the elimination of “pay if paid” clauses. We’ve talked about these clauses in the past, noting that they are “more advantageous for contractors” since payment is contingent on the owner’s ability to pay them. This clause might bail out contractors who are working with untrustworthy owners, but it creates substantial issues for lower-tier contractors and suppliers. The bill does not plan to eliminate “pay when paid” clauses, which differ slightly in that they allow a contractor to extend the timetable for compensation, but not indefinitely. 

This could have a significant effect on contractors who have successfully used pay if paid clauses in the past. Both pay if paid and pay when paid clauses have been regularly upheld in Tennessee courts. As long as the contract used clear language and explicitly stated that the subcontractor was choosing to assume the risk of nonpayment if the owner failed to pay, the clause was legally binding and enforceable. If the conditional “if” was not explicitly stated in the language of the contract, judges could interpret the clause as a pay when paid clause instead.

Who Accepts Responsibility for Nonpayment?

There is a perpetual struggle between contractors and subcontractors to heap financial responsibility on the opposite party. Who should rightfully bear the risk of nonpayment? The answer to that question will differ depending on who you talk to and their past experiences in the construction industry. On one hand, it seems logical for a contractor to not have to foot the bill for an owner who refuses to pay. On the other hand, subcontractors who have already paid out of pocket for labor and materials for a project don’t want their business to suffer from cash flow problems that were entirely out of their control. Although neither party wants to accept this risk, they do agree that owners should ultimately be responsible for nonpayment.

To learn more about the changes proposed by Senate Bill 324, read part two.

If you would like to speak with a Knoxville mechanics lien law attorney, please contact us today.

Disclaimer: The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation.