2010 Louisiana Legislative Amendments To The Private Works Act—Benefits General Contractors In An Uncertain Economy, But Creates Uncertainty Regarding Certain Louisiana Lien Law Issues
In an uncertain economy and a tightened and conservative lending environment, many general contractors have been harmed by the economic prospect of a real estate developer, property owner or similar developer who, during the course of a construction project, faces the withdrawal of bank financing, a deteriorating financial condition, or a decline in the demand for the contemplated project (condominiums, houses, tenant space, apartments and the like). When faced with that prospect, the general contractor is frequently left with an owner who files bankruptcy, breaches the construction contract, terminates the project or simply abandons the project.
In these circumstances, the general contractor (and indeed his subcontractors and their suppliers and materialmen) must seek protection through the institution of litigation, either through the benefits and enforcement of Louisiana’s Public or Private Works Act lien mechanisms or suits against the owner for breach of contract.
Unfortunately, because the construction project itself is frequently financed through a construction loan with a lending institution (which provides the lending institution with a first mortgage on the project itself), assertion of a lien by either the general contractor or his subcontractors and their suppliers, may not ultimately result in payment of sums due under the contract or for the materials, labor and supplies provided to the project, because frequently the construction mortgage is superior to the liens asserted under the Private Works Act.
Retainage is normal and customary in the construction industry, recognized and provided for under Louisiana law and in AIA document A201 (General Conditions between Owner and Contractor). The amount of retainage is a matter of agreement on private works (typically 10%), and is set by statute on public works at 10% for contract less than $500,000, and 5% for contracts over that amount (La. R.S. 38:2248).
Typically, retainage is withheld by the owner pending resolution of certain conditions, including successful completion of the contract, occupancy, and issuance of a clear lien certificate after expiration of the statutory lien period. Under La. R.S. 9:4822(M)(1), a contractor on a private project may elect to furnish at his cost a“retainage bond” equal to and in lieu of the amount of the retainage required by the contract whenever a contract between an owner and a contractor requires the withholding of sums for retainage. (See also, La. R.S. 48:256.1 regarding highway or bridge construction retainage bonds, and La. R.S. 38:2249 regarding public works retainage bonds).
With the aforementioned economic issues, the Louisiana Legislature attempted to address these issues during the 2010 Regular Session by providing a mandatory escrow mechanism pertaining to retainage on private projects.
The Legislature enacted a new subsection to the Private Works Act, La. R.S. 9:4815. This new subsection provides that: (1) where a construction contract is in an amount of $50,000, or more, and (2) provides for a contract retainage to be withheld by the owner, then, commensurate with the execution of the contraction contract, such “retained funds” SHALL be deposited by the owner into an interest-bearing escrow account.(1)
It requires that the escrow account be established at a qualified financial institution under the control of an escrow agent. Other provisions are as follows:
- The account may be an interest or noninterest-bearing account.
- The escrow agent and escrow account “shall be selected by mutual agreement between the owner and the contractor”.
Further, the law provides how the escrowed retainage is to be distributed at the end of the job or if there is a dispute:
- If there are no existing claims by the owner, then the retainage amount shall be paid to the contractor within three business days upon receipt by the escrow agent of a “written release” signed by the contractor and the owner.
- In the alternative, if there is a dispute between the owner and the contractor and the contract does not provide for a binding arbitration of such dispute, then: a)undisputed amounts shall be released by the escrow agent within three business days of receipt of a notarized request of the contractor; and/or b)disputed amounts, that are subject to a judicial proceeding, shall be released by the escrow agent within three business days of the receipt of a final order by the court.
- If there is a dispute between the owner and the contractor and the contract provides for binding arbitration, then: a)undisputed amounts shall be released by the escrow agent within three business days of receipt of a notarized request of the contractor; or b)disputed amounts that, are the subject to any arbitration provision, shall be released within three business days upon final receipt of the order of arbitration.
The statute further provides that the “written release” contemplated by this statutory mechanism, when signed by the contractor and the owner, or by the court or an arbitrator, shall be “deemed a full release and discharge of the escrow agent”.
The statute further provides that the “written release” is presumed to be valid and binding, because it further states: “neither the escrow agent nor the qualified financial institution in which the escrow account is maintained shall be held liable to any party based upon any claim that the written release is unauthorized, forged, or otherwise fraudulent.”
The effective date of La. R.S. 9:4815 was August 15, 2010. The statute fails to indicate if it applies only prospectively for contracts dated after August 15, 2010 or applies to current contracts. The statutory provision fails to identify what “contract” means and when the escrow should be established and under what circumstances. For example, if the owner and the general contractor enter into a contract that is for $40,000 and then implement a $50,000 “change order”, does the statute subsequently become effective? If so, when does that occur, the date of the change order?
Obviously, this was a successful lobbying effort by general contractors to “force” owners to deposit retainage sums into an “interesting-bearing account.” Conversely, is it a statutory provision which the owner can require that the general contractor waive?, i.e., can the parties contract around this statutory provision?
Also, for subcontractors, materialmen and suppliers who could be paid out of the retainage being held in escrow, the new statutory mechanism provides further unknowns associated with the procedural process to assert lien rights.
- Should the “escrow agent” now receive a notice of nonpayment, be notified of, and identified in, any lien, and/or be made a defendant in any lawsuit to enforce a lien?
- How does the “escrow account” interact with the statutory scheme already in place under the Private Works Act whereby remaining funds subject to any dispute are to be deposited into the registry of a court?
- Are the escrow (remember, “escrow account” has serious fiduciary and agency implications) funds held to benefit only general contractors or also subcontractors and suppliers on the job?
In sum: After August 15, 2010, the existence of this “escrow account” as a potential source of funds to pay for material, labor and work on any job should be investigated. Conversely, the creation of a statutory “escrow agent” possibly creates a new “party-in-interest” under the Private Works Act who may have certain rights and/or require notice of claims. Thus, any contractor should be fully aware of the benefits the new escrow mechanism provides, and any subcontractor, materialman or supplier should inquire about whether the construction contract follows the new statutory provisions, and: (1) whether the contract between the owner and the general contractor waives or requires the creation of the escrow account; (2) the location of (the lending institution, escrow agent, etc.) and the amount in the account; and (3) who the escrow agent is.
(1) The new law does not apply to construction contracts for single-family or “double-family” residences, and do not apply to certain types of commercial construction projects, including electrical power facilities, wood product and paper product manufacturing facilities.