Robert Noell Contract Article Appears in TBA eNews

Below is the article Robert Noell provided to the Tennessee Bar Association's online newsletter, eNews.

CONSTRUCTION CONTRACTS
Changes in the Law Regarding Retainage on Construction Projects

Effective July 1, 2007, owners of construction projects, both private and public, may no longer withhold the customary 10% of the contract price in order to secure the complete performance of their contractors.  Now, the retainage amount may not exceed 5% of the contract sum.  Furthermore, Owners are now obligated to release retainage for work completed pursuant to the terms of any contract with the prime contractor within 90 days after completion of such work or within 90 days after substantial completion of the project, whichever occurs first.  In turn, prime contractors must now pay all retainage due to any subcontractor within 10 days after receipt of such retainage from the owner.  T.C.A. 66-34-103.

For construction contracts entered into on or after July 1, 2007, the Legislature has now made it clear that retained funds shall not only be deposited in a separate escrow account but that such account must be interest bearing. (Previously, the law confusingly stated that any accrued interest would be the property of the contractor, but it did not actually require that the retainage be placed in an interest-bearing account.)  T.C.A. 66-11-144.

Owners and lenders should also be cognizant of the fact that there is no exception to the statute requiring retainage to be escrowed for owners that are borrowing the contract sum.  Accordingly, loan disbursements must be sufficient to cover both the payment then directly due the contractor and the deposit of the retainage amount in a separate escrow account.

In addition, the recent modifications of the Mechanics’ and Materialmen’s Lien Statute, which were signed into law by the Governor on May 18, 2007, now provide that disputes regarding retainage no longer must be litigated in court but may now be settled by arbitration conducted upon written agreement of all parties concerned.  T.C.A. 66-11-144.

Harsh Penalties for Those Performing Construction Work Without a License

Most know that it is unlawful for any person, firm or corporation to perform construction work in Tennessee without the appropriate license.  Please keep in mind, however, that, in addition to the penalties set out in the licensing statute that limit a contractor from recovering anything other than actual documented expenses that can be proven by clear and convincing evidence, performing construction work without a license constitutes a violation of the Tennessee Consumer Protection Act.  In addition, an individual who does not comply with the requirements of the licensing statute, and who would otherwise enjoy the limited liability protections afforded to owners of entities like LLC’s and corporations, is personally liable for their own representations, acts or omissions to the same extent as if that individual rendered such representations, acts or omissions as an individual.  T.C.A. 62-6-136.