In its 2011 legislative session, the Alabama Legislature made significant changes affecting the construction industry, specifically relating to the Prompt Payment Act and the Statute of Repose. This article provides practitioners with an update on those amendments.
A. Prompt Payment Act
Since 1995, Alabama law has provided a Prompt Payment Act, Ala. Code § 8-29-1 et seq., to assist contractors and subcontractors with recovering prompt payment for their services on construction jobs. The 2011 amendments modified the maximum retainage provisions included in the Act. These amendments went into effect on September 1, 2011, and apply to contracts entered into on or after that date.
The maximum retainage allowed to be withheld by the owner is 10% of the estimated amount of work properly done and the value of materials stored onsite or suitably stored and insured offsite. Ala. Code § 8-29-3(i). After 50% project completion has been accomplished, no further retainage may be withheld. Id.
In practical terms, therefore, an owner is limited to retaining 5% of the total contract sum as security for proper completion of the job (10% of earned payments for the first half of the job).
Contractors and subcontractors are limited by the same caps. Any retainage withheld in excess of the allowable amount will accrue interest at the rate of 1% per month (12% per annum).
The owner is required to release and pay retainage to the contractor for work completed on any construction contract no later than sixty (60) days after completion of the contractor's work as defined in its contract or "substantial completion" of the project, whichever occurs first. Ala. Code § 8-29-3(l)(1). "Substantial completion" means "the stage in the progress of the project when the project or designated portion thereof is sufficiently complete in accordance with the contract documents with all necessary certificates of occupancy having been issued so that the owner may occupy or use the project for its intended purpose." Ala. Code § 8-29-3(l)(2).
The contractor is required to release and pay retainage to its subcontractors for work completed in accordance with the payment terms agreed to in the parties' contract, but if payment terms are not agreed to, then within seven (7) days of receipt of payment from the owner. Ala. Code § 8-29-3(l)(1); Ala. Code § 8-29-3(b). Owners, contractors, and subcontractors may condition payment on the receipt of a full release of any lien of the contractor, subcontractor, or sub-subcontractor for the amount of work being paid. Ala. Code § 8-29-3(n).
The Prompt Payment Act does not apply to: (1) residential home builders; (2) improvements to real property intended for residential purposes which consist of 16 or fewer residential units; (3) contracts, subcontracts, or sub-subcontracts in the amount of $10,000.00 or less; or (4) contracts with state or local governments (although these contracts do have the benefit of payment bonds under Alabama's Little Miller Act, Ala. Code § 39-1-1 et seq.). Ala. Code § 8-29-7.
In addition, the Prompt Payment Act is not applicable in civil actions to enforce mechanics' or materialmen's liens under Ala. Code § 35-11-210 et seq. Ala. Code § 8-29-8. Finally, the retainage caps and 60-day rule do not apply to construction projects for or by an electric utility regulated by the Public Service Commission. Ala. Code § 8-29-3(m).
B. Statute of Repose.
The 2011 legislative session also saw amendments to the Statute of Repose that significantly limit the potential liability of architects, engineers, and general contractors for damages relating to their work on construction projects. Ala. Code § 6-5-220 et seq.
The amendments provide that no lawsuit may be filed against any architect, engineer, or licensed general contractor for any cause of action (whether in contract, tort, or otherwise) which arises more than seven (7) years after substantial completion of the construction project. Ala. Code § 6-5-221(a). (Formerly, lawsuits could be filed up to thirteen (13) years after substantial completion of a project.)
Under the statute, a cause of action "arises" at the time of injury or, where the injury is latent in nature, at the time the injury should reasonably be discovered. Ala. Code § 6-5-220(e). In general, a lawsuit must be brought within two (2) years after the cause of action arises, Ala. Code § 6-5-221(a), but a latent defect may not cause any actual injury or be discovered for many years after the project has been completed.
Before the current legislation, a latent defect could create a situation where potential liability could go on almost indefinitely. Under the amended Statute of Repose, however, if the cause of action does not arise within seven (7) years of substantial completion of the project, then the injured party is forever barred from filing a lawsuit against the architect, engineer, and general contractor on the project.
The amendments are not retroactive, so the new time limits will only apply to projects that are substantially completed on or after September 1, 2011.
Jaime W. Betbeze
Hand Arendall LLC