The Tennessee legislature recently passed the Construction Industry Payment Protection Act (“CIPPA”), SB2681/HB2706, which offers significant changes to the Tennessee construction industry.
Not only does the act amend Tennessee’s existing lien laws and construction defect statutes, including the statute of repose for construction and design defect actions, but it also impacts the Prompt Pay Act and the Truth in Construction Act. This is the first of a series addressing the changes and the legislature’s efforts to provide consistency and clarity in Tennessee construction law.
Effective July 1, 2020
Because these changes became effective July 1, 2020 and apply “to actions occurring and contracts entered into, amended, or renewed on or after” July 1, it’s important to consider the potential impact on any ongoing projects or amendments, contract renewals, or contract revisions, including change orders, after July 1, 2020.
While there are no major practical changes in lien enforcement in Tennessee, the amendments to Tennessee Code Annotated §§ 66-11-101, et. seq. clarified terminology to eliminate the word “action” and reflect the requirement of a court proceeding to enforce a lien. For instance, Section 66-11-126 was amended by deleting “action” and substituting instead “a complaint, petition, or civil warrant.” This, and the other changes, were intended to make the language of the lien laws consistent with other construction laws.
Otherwise, general contractors still have one year to enforce a proper lien. Remote contractors (i.e., subcontractors) are still required to send notices of nonpayment and notices of liens which are recorded within 90 days of the last day of each month where work was performed but not paid. A remote contractor must still file suit on any lien within 90 days of recording the lien. (See this previous post for more information on these deadlines).
Construction Defect Changes
Changes to Tennessee’s construction defect statute include changes to the way “action” is defined to create uniformity. Further, Section 66-36-101 specifically lays out the requirements for notice of construction defects prior to any action. The statute was amended to add a section specifically stating that the provision does not bar, limit, or replace any contractual rights, obligations, or duties that may otherwise be in effect for notice and opportunity to cure any construction defects. In short, the contract controls.
Statute of Repose
The time period remains the same: an action to recover damages for construction or design deficiencies must be brought within three years after the defect is discovered, but in no event later than four years after the project has achieved substantial completion. While the industry previously understood the statute to apply to all claims arising out of a construction project, the statutory language is now broadened to cover all “actions,” including “arbitrations” and “other binding dispute resolution proceedings” to recover damages that must be brought within the requisite period. This additional language closes the loophole and clarifies that the statute of repose applies regardless of whether the claim is resolved through litigation or alternative dispute resolution. Note that the amendment only impacts Tennessee’s statute of repose and not the three-year statute of limitations, which still only applies to “actions” as defined therein.
Prompt Pay Act
The new legislation also introduces changes under the Tennessee Prompt Pay Act (the “Act”), which governs the timing of construction payments. An overview of the key changes regarding payment on construction projects is detailed below.
New Notice Forms
Notice required under the Act is not new. However, with the new amendments, Tennessee has provided a statutory form an unpaid contractor can use in providing notification about its intent to invoke the prompt payment laws. It can also be included directly with a notice of nonpayment.
Increase in Interest
Section 66-34-602 notes that in the absence of an established contractual interest rate, interest shall accrue on amounts due at the statutory rate of 1.5% per month (18% per annum). This is an increase from the prior penalty, which was calculated at the formula rate for interest on judgments, which averaged around 5.25% per annum.
Stop Work/Injunctive Relief
The Act now provides a right to “stop work.” The new language contained in Section 66-34-602 largely mirrors the common law “notice and opportunity to cure” requirement, and it allows a prime contractor or a remote contractor an opportunity to provide notice that they will stop work 10 days after the notice is received in situations where they have not been paid. If the owner or contractor from whom payment is sought fails to make payment or provide a response setting forth adequate legal reasons for the failure to make payment within 10 days, the contractor may stop work until receiving payment. The unpaid party may also seek injunctive relief requesting other parties, including a bank, to deposit all funds held in trust into the court’s registry. Most importantly, the statute also states if the work is stopped, the party who stopped the work is entitled to an extension of the contract schedule, which could significantly affect a project’s completion.
The Act necessarily requires statutory retainage to be placed in an interest-bearing escrow account, and the funds to be released within 90 days of substantial completion of the project. The new changes to Tennessee’s retainage rules basically alter the terminology regarding penalties. Whereas the prior language of Section 66-34-104 penalized the failure to put retainage funds into escrow, the amended statute clarifies that this is not a penalty but should be construed as “damages.” Such damages are accrued from the first date when funds are withheld until the date when they are properly placed into an interest-bearing escrow account. Failure to properly escrow retainage can amount to damages up to $300 per day. Fines for failure to release retainage on time can be up to $3,000 per violation (per day), and it is considered a Class A misdemeanor. However, public entities are now exempt from retainage penalties or damages.
Tracking language from the American Institute of Architects and other common forms, Tennessee introduced a new statute as Section 66-34-603 that allows a prime contractor to demand reasonable assurances from the owner that it has obtained sufficient funding to pay for all labor and materials on a project. After the project begins, if an owner fails to make payments, contractors may again demand reasonable assurances of the owner’s financial arrangements. The request may be included within a contractors Stop Work Notice. The new language also provides a statutory form for the demand.
Then, the owner must provide either (a) reasonable evidence they’ll be able to fulfill their obligations; or (b) adequate legal reasons for their failure to make payment. If the owner does not provide an adequate response within 10 days, the contractor may stop work.
This section only applies to private property owners in Tennessee.
Bankruptcy/Insolvency Not an Excuse
The revisions to the Act also state that bankruptcy or insolvency is not an excuse for failing to release sums allocated by, or provided or committed to, an owner (including retainage) when those sums become due.
Limitations of Liability
The Act also added Section 66-34-7 which confirms that a limitation of liability provision in a construction contract does not violate the public policy of Tennessee. Provided the amount is reasonable, courts should enforce those provisions as written.