New Louisiana laws impact construction payments

Louisiana Governor Jeff Landry signed into effect two new laws reshaping payment protocol during construction projects and expanding on defenses afforded to sureties. The two laws grant sureties a new defense against nonpayment claims previously reserved for general contractors and detail a timeline for material suppliers sending notices for missed payments. 

The laws will largely impact subcontractors on public construction projects in Louisiana, which are not receiving payment on time. Where private construction projects allow subcontractors to file a mechanic’s lien when they have not received payment, it is more challenging for those working on public projects. In those cases, subcontractors’ “lien rights” only appertain to the contract sum amount held by the public owner, and the general contractor’s Public Works Act surety may be able to refuse payment if the general contractor has not yet been paid. 

Why it matters: These new laws, La. Acts Nos. 758 and 761, allow sureties to refuse payment when there is a “pay-if-paid” or “pay-when-paid” clause in their contract.

• Whether tucked deep within a contract or hidden within complicated language, pay-if-paid and pay-when-paid clauses can now be used as a defense by sureties to avoid paying nonpayment bonds to subcontractors.

“Sureties are these clauses as a defense: they know they should be paying you, but by contract you’ve already agreed to the fact that you’re not going to get paid unless they get paid,” said Chris Ring of Secured Transaction Services (STS). “The main crux of the legislation is for a surety to say, ‘if you have this type of language in your contract, I can use it as a defense to not have to pay.’” 

Pay-if-paid clauses are commonplace in construction contracts. These clauses are primarily intended to transfer any risk of loss related to nonpayment down to lower-tier subcontractors, according to the American Bar Association. Construction credit professionals are likely all too familiar with these aggressive clauses. For those with customers in Louisiana, it is important to heed these new laws and prepare to look closely at contracts in the future. 

“Pay-if-paid clauses are daunting,” Ring said. “Most people try to strike them from contracts because they are not really fair: A subcontractor, in good faith, has performed work for a general contractor and the general contractor is saying, ‘Well, I haven’t been paid by the public entity, and you agreed to that pay-if-paid clause … so the only way I’m going to pay you is if I get paid.’”

To avoid running into this issue, read your contracts carefully to ensure there are no pay-if-paid clauses before you sign.  “You have to read the entire contract carefully and figure out where that language might be,” Ring said. “If it’s there, cross it out or ask for a new contract.”

It is important to note the difference between “pay-if-paid” and “pay-when-paid” clauses. The concept of a “pay-if-paid” clause is that if the upstream contractor never gets paid, the downstream contractor is never legally entitled to payment.

“That’s legal in Louisiana, as it is in many states,” said Attorney Daniel Lund III, head of the construction law practice of Phelps Dunbar in its New Orleans office.

The “pay-when-paid” clause is typically viewed only as a timing mechanism: after a reasonable period of time has passed, even if the upstream contractor remains unpaid, the downstream contractor is nonetheless owed its money.

“The key is the contract language: wording like ‘condition precedent,’ ‘if and only if,’ and the like typically signal a ‘pay-if-paid’ clause,” Lund added. “Some courts in other states have gone so far as to require more exacting language, to the point where a contractor seeking to place a ‘pay-if-paid’ clause in a contract must overtly declare to the effect that the downstream contractor ‘bears the utter risk of owner [or other upstream party] nonpayment.’ In Louisiana, ‘pay-if-paid’ language can probably be more nuanced than that and, hence, subcontractor vigilance in negotiating and simply reading contracts is key.”

Billing between contractors, subcontractors and suppliers can be tricky, with payments being rolled out at various checkpoints during the building process. With such a complicated cycle of billing, sureties often become involved in settling nonpayment claims.

The laws also overhaul the billing cycle for material suppliers, giving clear deadlines for when late notices can be sent: Material suppliers must wait 45 days from the date of delivery before they can send a notice of nonpayment to the general contractor, the surety and the owner. If the supplier has not been paid in full after 90 days, they can send a formal notice of nonpayment to the general contractor, surety and the owner, which will require a payment within 10 days of delivery. 

Those with customers in Louisiana working on public construction projects should not only be aware of this law but also discuss possible outcomes of the legislation with their team to create the best plan of action going forward. 

The bottom line: The newly enacted Louisiana laws reshape payment protocols during construction projects, allowing sureties to refuse payment to subcontractors based on “pay-if-paid” or “pay-when-paid” clauses in their contracts, and setting clear deadlines for material suppliers to send nonpayment notices.