Ohio's Prompt Pay Provisions - A Statute Designed to Help Lower Tier Contractors and Suppliers Get Paid

Ohio's Prompt Pay provisions, codified in Ohio Revised Code 4113.61, affords the lower tier contractor a resource to obtain payment from his contractor. The provisions, if properly followed, exact severe penalties to the contractor if they fail to pay their subs and suppliers within the statutory time limits. In the event the contractor fails to pay his subcontractors or suppliers within 10 days of being paid for the subcontractor's work or for material supplied, the law provides an 18% per annum interest rate on the amount owed, PLUS attorney fees.

In order to succeed in a claim under the prompt payment law, the subcontractor or supplier must:

1. Prove a valid and enforceable contract claim.

2. Prove that an accurate invoice was submitted to the contractor for payment.

3. Prove that the subcontractor or supplier allowed the contractor sufficient time to include the invoice in the contractor's invoice to the owner;

4. Prove that the contractor was paid for the invoice submitted for work or materials set forth in the subcontractor's or supplier's invoice.

5. Prove that the contractor refused to timely pay the subcontractor or supplier an amount equal to the percentage of completion allowed by the owner; and

6. Prove there is no valid reasons for the contractor to withhold any amount necessary to resolve disputed claims involving the work or materials.

If subcontractor or supplier successfully establish these provisions, the contractor is required to pay the subcontractor or supplier interest in the amount of 18% per annum from the 11th day the payment is not made. The law also allows for attorney fees.

As you can see enforcement of these provisions are highly technical. Competent counsel should be retained to enforce these statutory provisions.

Collecting Your Money

In my many years of practice, I have encountered many clients who have trouble collecting debts owed to them. My first such encounter was a “simple” collection matter. I asked the client to forward his “file” and it consisted of a single invoice (Names are changed for ethical reasons):

ABC Company

1234 Main Street

City, State 11111

July 1, 20–

Mr. & Mrs. Smith

For services rendered $5000.00

Yes, this was the ENTIRE file presented by my client. No contract, no address, no required disclosures – merely the invoice shown above.

While businesses have matured and the obvious mistakes, both tangible and implied, characterized by this invoice are not longer made, this document is symbolic of errors of omission and commission present even in today’s business. Summarizing my experience in collecting debts, errors are categorized as follows: (1) Enforcement issues, and (2) Legal issues.

Enforcement Issues

Initially a company should be sure any contract entered into is enforceable. This means more than a “meeting of the minds.” It also requires that covenants contained in your agreement are enforceable.

Webster simply defines a contract as “A formal agreement between 2 or more persons.” In actuality, it is a bit more complicated. Black’s Law Dictionary is a bit more illustrative of the elements of an enforceable contract by stating a contract is “An agreement, upon sufficient consideration, to do or not to do a particular thing.” It goes on, “It is [an] agreement creating [an] obligation in which there must be competent parties, …legal consideration…, [and] mutuality of agreement…”.

Legal mumbo-jumbo, yes, but the enforcement of your agreement depends upon your ability to prove the defined elements of contract. To enforce your contract these elements must be present in any agreement.

So, what should be contained in my contract in order to enforce the agreement? Here is a short list:

1. Obtain the FULL and LEGAL NAME(S) of the other party.

2. Get the CORRECT ADDRESS. The location where you are performing your services or where you are delivering the goods may not be where the party resides or its main place of business..

3. Be sure you fully define what service or material you are providing.

4. Set forth the terms and amount of your compensation as well as when payment is due.

5. If the other party is preparing the contract make sure all terms, exhibits, and addendums are attached to the executed copy.

What additional information should I collect? Sometimes, in spite of your efforts issues arise regarding the terms of the contract. The following is a list of recommendations:

1. Retain summaries of telephone conversations you have with customers.

2. Maintain labor and material job costs.

3. If possible obtain the social security number or federal identification number of the other party.

Legal Issues

Beyond the ordinary terms of any contract are statutory and legal requirements that impact on the enforceability of any contract. Consumerism, politics and legal precedent have posed additional burdens upon any business.

Over the years, the courts have ruled upon many issues, particularly the enforceability of certain covenants of a contract. Among the covenants applicable are:

Liquidated Damage Clauses – Uniformly, most states have looked unfavorably upon these clauses. Typically, they call for the party to pay a given amount as “liquidated damages” for the party’s of certain terms of the contract. Generally, the courts have severely limited the enforceability of such clauses. The courts have ruled there must be some correlation between the stipulated damages and the actual damages incurred by the contractor. The burden is upon the creditor to prove these damages. The inability of the creditor to prove these damages renders the clause unenforceable.

Warranty Waivers – Most contracts have some limitation to the warranties given by a party. With the advent of the “Uniform Commercial Code,” which has a major impact the law relating to sales of goods, the waiver of warranties or other representations require definitive language to render them enforceable. Each state has promulgated its own rules. I strongly recommend you seek assistance of a professional to determine whether your limitation of warranties clause is statutorily correct.

Collection Clauses – Typically these clauses call for the owner to pay all costs of collection, including attorneys fees, in the event the contractor must sue to collect. The courts seldom enforce these clauses. The reasoning behind this is based upon “public policy,” i.e. that the clauses are fundamentally unfair.

The states have placed additional statutory burdens upon the creditor. Among laws having applicability are:

Consumer Protection Laws – These laws generally define what are unfair sales practices and run the gambit from “bait-and-switch” schemes to sales tactics. Among the more pertinent laws relate to home solicitation sales and estimate requirements. Both laws require statutory language be included in every contract. Home solicitation laws generally require specific language notifying the consumer of their right to cancel a contract within a specific period of time and a form containing additional language outlining their rights. Estimate laws require the contractor to notify the consumer of their right to obtain an estimate for services to be rendered. Both laws materially affect the enforceability of a contract as they provide leverage for the consumer in the event the contractor fails to comply with these statutory requirements.

I also suggest a detailed reading of the provisions of this act. This act has provisions that regulate more than “home solicitation sales.” Consumer protection laws are used to protect the personal consumer against private lenders, auto repair shops, small furniture stores, etc. The regulations enacted under the statutory law has broadened the provisions of the act enormously.

Debt Collection Laws – The Federal government has enacted the “Fair Debt Collection Act” which sets forth rules a collector must follow when collecting a debt on behalf of a client. A number of states have incorporated these rules indirectly by setting forth a violation of the act as an unconscionable act under their consumer laws.

Regulation “Z” – This Federal regulation is applicable to those regularly extending debt. The regulation defines who is a “creditor.” Those thinking such regulations only to banks or other such institutions are patently wrong. The definition includes many small businesses such as car dealers, rental companies, and even individuals allowing for payment over time.

As you can see there are a number of steps you can take to protect the collectibility of monies owed you. Additionally, there are steps you can take to prevent legal entanglements that could prevent the collection of monies owed you. A little accounts receivable management using some of the techniques and preventive measures outline above will go a long way in insuring the collection of money owed you.

Unjust Enrichment - Equitible Relief for the Creditor

Many of my clients fail to recognize that the law does recognize equitable forms of relief when they can not prove the existence of a contract. This is known in the law as "equitable" relief. A perfect example is the typical law school example where the contractor paints the wrong house. He has rendered a benefit to the homeowner but there is not privity of contract between the contrator and the owner. This type of equitable relief is known "Unjust Enrichment."

The theory of unjust enrichment is equitable relief a court will grant when the court deems it unfair that someone obtains a benefit without paying a fair price. This theory of liability arises when there is no privity of contract between the parties, yet one party has obtained a benefit through the other’s efforts. For example, if the XYZ Company supplies construction material for a given job and, through the principal contractor’s default, the XYZ Company does not get paid , the court could award XYZ Company an amount equal to the fair market value for the material. The theory of unjust enrichment is equitable relief a court will grant when the court deems it unfair that someone obtains a benefit without paying a fair price. The court could award the company an amount equal to the fair market value for the material supplied if all the "elements" of unjust enrichment are met.

As I said, there are elements that must be met before the contractor can succeed. These are:

1. A benefit was conferred by the contractor upon the owner of property,

2. The owner knew the benefit was being conferred, and

3. Retention of the benefit by the owner would be unjust without payment.

The latter two elements are the most difficult. The contractor must prove that the owner knew the work was being performed and that it would be inequitable for the owner to retain this benefit without paying the contractor. This final element is what is called “balancing the equities.” For example, if the owner has paid the original contractor in full, the courts, in certain jurisdictions, have stated that it is inequitable to make the owner pay twice and found in favor of the owner. On other hand, where the owner has not paid the original contractor in full or has paid others to complete the work, courts have found in favor of the contractor.

The thrust of this type of relief is that an individual can not just sit and allow another to confer a benefit upon them without paying for it. Examples are when goods are shipped or delivered to the wrong location, the person accepts the goods and uses or resells the goods or when a contractor paints the exterior of a building and the owner allows the painting to continue without notifying the painter that they are painting the wrong building or where the contractor failed to properly perfect a mechanic's lien. To give you a personal example, some years ago I represented a client who was paid even though he demolished the wrong building! My client mistakenly raised the building next door. Luckily, the building he did demolish was condemned and the court awarded my client the reasonable fees for the demolition.

So don't give up hope. There is some relief available even if

Ohio's Mechanic's Lien Law - Public Improvements

In a prior blog, I discussed the use of mechanic's liens and the statutory requirements prior to the recording and perfection of such a lien. That blog discussed the use of mechanic's liens for private improvements - improvements on property owned by non-public individuals and entities. The purpose of this blog is to discuss the requirements when perfecting a "lien on public improvements.

A “Public Improvement” means any construction, reconstruction, improvement, enlargement, alteration, demolition, or repair of a building,..., and any other structure or work of any nature by a “public authority.” A “Public Authority”includes the state, and a county, township, municipal corporation, school district, or other political subdivision of the state, and any public agency, authority, board, commission, instrumentality, or special district of or in the state or a county, township, municipal corporation, school district, or other political subdivision of the state, and any officer or agent thereof.

In applying the law to Public Improvements, the language is really a misnomer as the law does not permit a subcontractor to record a lien upon land owned by a public authority (see definition above). What the law does permit is the right of the subcontractor to place what is termed a “lien upon the fund.” As a result, the prerequisites are somewhat different.

The law is the same when it comes to an owner’s obligation to prepare and have readily available, a Notice of Commencement. Unlike a private improvement, the Notice of Commencement need only be retained by the general contractor (known under this section of the statute as the "original contractor"). It need not be posted or recorded.

While the subcontractor is required to prepare and serve a Notice of Furnishing, the law requires service upon the principal contractor only - not the owner - within 21 days of the of the material being furnished and/or the subcontractor commencing work on the job. Not withstanding this difference, I recommend my clients serve not only the original contractor, but the owner and surety (see my discussion of surety liability in a prior blog).

Having properly served the Notice of Furnishing, the subcontractor may serve an “affidavit” upon the public authority within 120 days of completion of its work, setting forth certain information required. Upon receipt of the affidavit, the public authority must set aside sufficient funds to pay the subcontractor. The public authority is then required to serve a copy of the affidavit upon the principal contractor who must dispute the claim within 20 days. If the claim is undisputed after 20 days, the public authority must pay the subcontractor. Any public authority, principal contractor or subcontractor may dispute the claim and send the claimant a “Notice to Commence Suit” which must be filed within 60 days of receipt of the notice. Once again, proof of service of the documents set forth in these statutes is critical to ensure proof of service and protection of a contractor's rights

Ohio's Mechanic's Lien Law - Private Improvements

Ohio's Mechanic's Lien Law can be a valuable tool to ensure payment to the subcontractor. But, Ohio law obligates those taking advantage of the law to strictly comply with the requirements of the law. Failure to comply with any of the obligations under the law will render any lien invalid.

Ohio’s Mechanics’ Lien Law is governed by various statutes, O.R.C. §1311.01, et seq. The law, which was totally rewritten some years ago, basically divides the law into two categories - private improvements and public improvements. The laws are acutely different depending upon the entity who owns the property upon which the improvement is being made. A “Public Improvement” means any construction, reconstruction, improvement, enlargement, alteration, demolition, or repair of a building,..., and any other structure or work of any nature by a “public authority.” A “Public Authority”includes the state, and a county, township, municipal corporation, school district, or other political subdivision of the state, and any public agency, authority, board, commission, instrumentality, or special district of or in the state or a county, township, municipal corporation, school district, or other political subdivision of the state, and any officer or agent thereof. Any other type of construction or improvement is a private improvement. Private improvements are further broken down into commercial construction and home construction. In this blog I will discuss "private improvements." Subsequent blogs will discuss "public improvements" and "Home Construction Contracts."

The statutes relating to private improvements first require that the owner prepare a Notice of Commencement containing certain information. This notice must be posted on the job site, recorded with the county recorder and be readily available to any subcontractor. A subcontractor is then required to serve upon the owner a Notice of Furnishing which also contains information sufficient to put the owner on notice that the subcontractor is working on that job. This notice MUST be served upon the owner within 21 days of the material being furnished and/or the subcontractor commencing work on the job. While the statutes permit various forms of service, I recommend the owner be served by certified mail, return receipt requested or other like service to ensure the subcontractor has proof that the owner received the required notice. I also recommend the notice be sent to other parties set forth in the Notice of Commencement. Assuming the Notice of Furnishing is completed correctly and served upon the owner, the subcontractor has now perfected its right to file a mechanics’ lien.

If a lien is to be filed due to non payment by the original contractor, the statutes call for strict compliance with the completion, recordation and service of the lien. First, the statutes call for certain detailed information be contained in the lien document. Then, the lien must be recorded in the county recorder’s office within seventy-five days of the last work performed or material furnished. Note, this time period can not be expanded by the use of “repair” work. The time begins to run after the subcontractor has completed substantial work on the premises. Also, note it does take time to obtain the information required in the lien document. Therefore, it is strongly recommended that the decision to place a lien be completed by the forty-fifth (45th) day to give your attorney sufficient time to gather the required information.

After lien is recorded you must serve the owner within thirty days of the recordation date of the lien. Again, the statute calls for various forms of service, but it is recommended the owner be served by certified mail, return receipt requested or other like service to ensure the subcontractor has proof the owner received the required notice and that the various other entities set forth in the Notice of Commencement were served with a copy. In the event the owner refuses to accept service of the lien, the law does provide for others means of service.

There are two important nuances in the law. First, if you are in direct privity with the owner, you need not provide a notice of furnishing. Second, if this improvement is for the private home of the owner, you need not provide a notice of furnishing.

Surety Liability

Most contractors believe that a surety’s liability is absolute if the subcontractor’s statement is not paid. This is not true. Once again, the Ohio Revised Code sets forth the requirements before a subcontractor can demand payment from the surety.

If the subcontractor is owed more than thirty thousand dollars, a Notice of Furnishing has to to be served upon the surety as set forth in the mechanics’ lien law. This means that the surety must be served with a Notice of Furnishing within 28 days of the first work being perfomred or material furnished.

Upon completion of the job, or the last material being furnished, the subcontractor must serve the surety with a statement of the amount due within 90 days of the completion of the contract and acceptance by the owner of the property. After 60 days, the subcontractor can commence a law suit against the surety, but this lawsuit must be filed within one year of acceptance by the owner.

Lets use an example to deonstrate your obligations under the law. You are contracted by the general contractor to supply and install a floor in the new high gymnasium. You commence your work on January 1. You complete the work on March 31 and the board of education provides a notice of acceptance on April 30. The original contractor goes out of business prior to the entire gymnasium is completed and you have not been paid.

What is required of you prior to the surety's liability in this example? First you had to provide a Notice Furnishing to the surety within 30 days of the commencement of your work, or in this example, by January 30. You then must notify the surety within 90 day of the acceptance of the work by the property owner, or in this example, by July 30. Failure to provide either of these notices, on a timely basis, may preclude your sharing any surety's distribution.

I would also point out that many bonds require that all funds (including any retainage) be paid to the original contractor before the surety is obligated to pay the subcontractors. Therefore, if the property owner is retaining funds due to the original contractor’s breach, the surety is not yet liable.

Contract Drafting - What You Say, Or, More Importantly, What You Don’t Say, Can Lead to Disputes with Your Customer

You arrive at the home or office of a prospective customer, form contracts in hand, ready to redress the customer’s needs. After leaving the customer with an estimate (signed by you, but not by the customer), you begin work only to run into constant questions, changes, and consternation between you and your customer. Eventually, you are asked to leave or, worse, the customer refuses to pay. Is this an all-to-often scenario? Such an experience can be avoided by following some simple rules when drafting your estimate.

Put yourself in the place of the customer. Does your customer understand all the terms? As with any other profession, the industry has developed “terms of the trade” that may or may not be easily understood by laymen. While easily understood by members of the trade, they may have an entirely different meaning to the customer. In the event of a dispute, the definition of a term will be construed most favorably on the side of the customer. Therefore, it is vitally important you explain clearly the terms of the contract. Better yet, define your terms, in writing, in the contract. Does the customer understand exactly what you are doing? The “process” you use may be foreign to the customer. They may not understand the necessity to proceed as you recommend. They may even think the process you are using is merely an attempt to extract more money. Be sure to explain, thoroughly, the process you are using and the reason for doing so. Once again, put it in writing.

Have a “meeting of the minds.” Do all parties know and understand what they have agreed to do? Does the customer understand the structural problems the job entails? Are you being realistic regarding your ability to perform what is needed given the customer’s budget? Will the job be a permanent fix or just a temporary solution? If merely temporary, be sure the customer understands the temporary nature of the repairs and agrees.

Always be in a “collection” mode? I’ll never forget the client who gave me a file to collect. The only information in the file was the name “Mr. & Mrs. Smith” and the amount owed. Ask yourself these questions when preparing the contract:

1. What is the full and legal name of the customer?

2. Is the person signing the contract the owner of the property?

3. If not, do they have the authority to enter into a contract on behalf of the owner?

4. What is their home or office address? The address of the job may not be where the invoice should be sent.

Tell them what you will not do. Remember these two statements which should be part of any contract:

1. “There are no covenants or representations made other than those set forth in this contract.”

2. “There are no guarantee or warranties, either oral or written, for fitness for a particular purpose, or otherwise, other than those set forth in this contract.”

By using these two phrases, the customer cannot rely on any representations made outside the written contract nor imply any warranties or guarantees made other than those set forth therein. While these phrases are important restrictions and set forth limitations, they also protect you from the representations of over zealous sales persons.

Get it in writing. Oral agreements are problems waiting to happen. Customers have selective hearing. Your interpretation of what was agreed upon may be drastically different from that of the customer’s. Solution – put your agreement in writing, setting forth the information using the tips outlined above, and have the party is ultimately responsible for payment sign the agreement. Remember, an unsigned estimate is not a written contract. A written contract is defined as one signed by both parties.