#47: Does New Hampshire Need a “Prompt Pay” Statute?
Every state except New Hampshire has enacted a so-called “Prompt Pay” statute for public constriction projects, typically modeled on the federal statute (31 U.S.C. §§ 3901-3905), under which the government must pay the GC for satisfactory performance within 14 days of a requisition for payment and the GC must pay subs within 7 days from receipt of payment from the government. Nearly half of the states – including all three of New Hampshire's neighbors – make their Prompt Pay statutes applicable to private construction projects as well. Maine (10 M.R.S. §1113 et seq.) makes payments due according to the parties' contract, but if not outlined by contract, they are due 7 days after the prime contractor receives the sub's invoice or payment from the owner (whichever is later). Vermont (Tit. 9, §4001 et seq.) has the same deadlines, but does not permit them to be varied by contract. Massachusetts (G.L. ch. 149, §29E), which limits its statute to projects of a value of $3,000,000 or more, requires a GC to approve or reject a sub's requisition within 22 days of submission (failure to act on it within that time is deemed an approval), and to pay subs within 52 days. All of these statutes impose varying interest and attorneys' fees penalties for failing to comply.
Should New Hampshire enact a Prompt Pay law for private construction jobs? I'd like to get readers' opinions on this, but my answer is “No.” New Hampshire has always placed a premium on freedom of contract, and parties are free to prescribe whatever payment terms they wish. Particularly when it comes to general contractor-subcontractor relations, the disparate bargaining strength between GC's and subs that motivates Prompt Pay laws elsewhere strikes me as less stark in New Hampshire.
Where I typically see unjustifiably delayed payments to subs is when an owner withholds payment to a GC for reasons unrelated to a particular sub's work, yet the cash-strapped GC withholds payment from that sub. Even this complication can be contracted around.
One thing I do like about Prompt Pay laws is their elimination of the “double filter” that some subcontract forms contain, requiring a sub to perform its work to the satisfaction not only of the owner and/or architect but of the GC as well, who will occasionally spot a problem that the owner/architect may fail to catch, yet decide nevertheless to requisition for the work. If a Prompt Pay law is in effect, payment to the GC for the sub's work effectively becomes the test of its acceptability for purposes of paying the sub until such time – if ever – that the owner wises up. Most commercial prime contracts include language to the effect that payment by the owner is not deemed acceptance of the work paid for (and many subcontracts bind the sub to the same provisions that bind the GC to the owner), so the possibility of a “claw back” for deficient work previously paid for still exists at both levels. Prompt Pay laws prevent the GC from using money paid by the owner for such work as a rainy day fund against such a possible claw back, thereby creating an incentive for the GC not to requisition for defective work in the first place.
Because a GC is not required to pay a sub when the GC has other legitimate offsets against a sub's pay req, Prompt Pay laws typically allow bona fide reasons for withholding payments to subs despite the GC's receipt of payment from the owner for that sub's work. (Vermont, for example, allows for “withholding an amount equaling the value of any good faith claims against an invoicing contractor.”) The penalties imposed by Prompt Pay laws up the ante for the GC whenever the sub sues for the money retained as a setoff by the GC; if its basis for withholding payment is not sustained by the courts, the question of whether the GC's “good faith” is a defense to liability under the statute, and if so whether such good faith even existed, comes to the fore. While the matter is debatable, I am far from convinced that this type of added risk imposed on GCs is sound public policy.