Recent Changes in Tennessee Law: The Construction Industry Payment Protection Act of 2020

By: Meridian Law

Middle Tennessee’s already-robust economy has continued to grow despite a global pandemic that changed the nature of business and industries throughout the United States. Nashville has one of the strongest economies of any U.S. metropolitan area, thanks, in part, to backing from state and local governments. Tennessee’s appreciation for the principles of free enterprise set the tone for the “builders boom” that has been taking place over the past several years.[1] That is why it should come as no surprise that Tennessee’s legislature would work to ensure that the state’s construction laws are not only up to date but sensibly adjusted to promote continued growth. 

In the summer of 2020 – the height of the COVID-19 pandemic – the Tennessee legislature used its powers during a time of fear and uncertainty to enact the Construction Industry Payment Protection Act (“CIPPA”), which amended the Prompt Pay Act of 1991 governing construction contracts and payments arising from them (the “1991 Act”)[2] to reallocate or otherwise address various risks related to payment for construction work.[3]  

The enactment of CIPPA nearly thirty years after adoptioning the 1991 Act provided more meaningful law regarding the relationship between parties in Tennessee’s expanding construction industry. With this in mind, let us look at some notable aspects of CIPPA and how its adoption will affect property owners, developers, and contractors from now on.

Invoking Right to Demand Payment

Photo by Jesse orrico on Unsplash

 CIPPA creates rights for contractors demanding payment. Previously, contractors, subcontractors, material-men, or furnishers who had not received payment from a contractor, could seek those payments by notifying the party of the 1991 Act and their intent to seek the payments thereunder. The notification had to be made by registered or certified mail, and the unpaid party could sue for compensation and injunctive relief if the non-paying party failed to pay or give adequate legal reasons for the failure within ten calendar days of the notice.[4]

Under CIPPA, the rights and remedies of unpaid parties are more straightforward. The new language creates a right for the unpaid party to issue a ten-day stop-work notice (“Stop Work Notice”) if they do not receive payment, or adequate legal reasons for nonpayment, within ten calendar days.[5]

While these changes may seem minor, the Stop Work Notice gives the 1991 Act more “bite.” Now, an unpaid contractor can stop work and extend the contract schedule with proper notice. Moreover, work stoppage by a contractor under CIPPA entitles the contractor to an extension of the contract schedule, if any, equal to the length of the work stoppage.[6] At a bare minimum, this change will impact how non-paying parties approach obligations to contractors.

 Approval of Limitation of Liability Clauses

Another significant addition of CIPPA relates to the limitation of liability provisions in construction contracts. Seeing an opportunity to solidify Tennessee’s public policy, the General Assembly added a new section that declares that “it is not against the public policy or interests” of Tennessee to include a provision “in any agreement relating to the design, planning, supervision, observation of construction, repair, or construction of an improvement to real property” to limit the liability of anyone providing work or materials to a “reasonable monetary amount.”[7]

It is fair to assume that, with this new section in hand, Tennessee courts will enforce liability limitation provisions in construction contracts so long as the amount of the limitation is “reasonable.” This addition incentivizes parties of a prospective contract to negotiate adequate but reasonable terms limiting liability.

 Right to Demand Reasonable Assurances on Funding

CIPPA added new language to the 1991 Act that affords a prime contractor several options to obtain assurances about funding from an owner. Before the commencement of operations, a prime contractor is entitled to make a written request to the owner demanding “reasonable evidence” that the owner has “procured a loan . . . or has otherwise made financial arrangements sufficient to make all payments in accordance with the contract.”[8] After the commencement of operations and upon an owner’s failure to pay as required by written contract, a prime or remote contractor may provide the same notice.[9] The demand for reasonable assurances on funding may be sent independently or as part of a Stop Work Notice.[10] These changes allow contractors to ensure enough capital to cover all labor, materials, and services provided under a contract. 

Escrowed Funds to Be Held in Trust and Damages for Failure 

Another addition relates to withheld funds. Under CIPPA, any percentage or amount of a contract price relating to real property that the owner retains must be deposited in a separate, interest-bearing escrow account.[11] Once deposited, those funds become the property of the contractor to whom they are owed, subject only to continued retainage in the event of default or nonperformance. Suppose the party withholding the retained funds fails to deposit the funds in an escrow account. In that case, that party will have to pay the owner of the funds (the contractor) “an additional three hundred dollars ($300) per day as damages, not as a penalty, for each day that the funds are not so deposited.[12] These statutory damages “accrue from the date retained funds were first withheld and continue to accrue until placed into a separate, interest-bearing escrow account or otherwise paid.”[13] This damage provision places a financial incentive on owners to protect their contractors’ retained funds and allow them to accrue interest while being withheld.

Statutory Interest Rates on Nonpaid Amounts

CIPPA gives additional clarity on interest rates for retainage. The 1991 Act partially addressed the issue of interest accrual on nonpaid amounts by stating that it would accrue interest “from the date due until the date paid at the rate of interest for delinquent payments provided in written contract.”[14] But what if the contract did not specify what the interest rate would be? CIPPA’s supplemental provisions address that question by adding that, absent a contractual interest rate, interest will accrue at one and one-half percent (1.5%) per month.[15] This provision benefits contractors who did not contemplate a contractual interest rate if they become entangled in a dispute over payment under their contract.

 Certain Requirements Are Not Subject to Contractual Waiver

Foreseeing the potential that parties with superior bargaining power might try to circumvent some of CIPPA’s requirements, the legislature also added a new statute to prevent that. Under CIPPA, the following cannot be waived by contract, as a matter of public policy: 

(1) compliance with Tenn. Code Ann. § 66-11-104’s provisions for attachment of lien; 

(2) compliance with Tenn. Code Ann. § 66-34-205 requirement that funds are to be held in trust for the benefit of contractors; 

(3) Tenn. Code Ann. § 66-34-602’s right to provide notice of nonpayment; and 

(4) Tenn. Code Ann. § 66-34-603’s right to demand reasonable assurance of funding.[16]

Contractors with Questions, Contracts under Negotiation, or Payments in Dispute Should Seek a Consultation with Meridian Law 

Anyone who has made it this far is almost assuredly involved with providing construction services in Tennessee. If you need assistance with negotiating, drafting, or reviewing contracts; general counsel regarding your company’s compliance with contracts or regulations; or attorneys to represent you in litigation over nonpayment, breach of warranty claims, or suits for construction defects, please contact Meridian Law, PLLC  at (615) 229-7499, info@meridian.law, or www.meridian.law.

Disclaimer: The information in this blog post (“post”) is provided for general informational purposes only and may not reflect the current law in your jurisdiction.  No information contained in this post should be construed as legal advice from Meridian Law, PLLC or the individual author, nor is it intended to be a substitute for legal counsel on any subject matter. No reader of this post should act or refrain from acting on the basis of any information included in or accessible through this post without seeking the appropriate legal or other professional advice on the particular facts and circumstances at issue from a lawyer licensed in the recipient’s state, country, or other appropriate licensing jurisdiction.

[1] See, Brooke Reese, Business is booming, growth continues despite pandemic in Middle Tennessee, WKRN – TV, Nov 2, 2020: https://www.wkrn.com/news/nashville-2020/business-is-booming-as-pandemic-does-not-stop-expansion-in-middle-tennessee/; and Jenn Goodman, Construction Dive's 'mini megacities' to watch: Nashville, Tennessee, Construction Drive, Jan 21, 2020: https://www.constructiondive.com/news/construction-dives-mini-megacities-to-watch-nashville-tennessee/570709/

[2] The 1991 Act is codified at Tenn. Code Ann. §§ 66-34-101 through 66-34-704. CIPPA refers to the recent 2020 Act that amended and supplemented provisions in the 1991 Act.

[3] 44 No. 20 Construction Contracts Law Report NL 6. (CIPPA was signed into law on June 22, 2020 and took effect on July 1, 2020.)

[4] CONSTRUCTION—PROMPT PAYMENT, 1991 Tennessee Laws Public Ch. 45 (H.B. 875).

[5] 44 No. 20 Construction Contracts Law Report NL 6; Tenn. Code Ann. § 66-34-602.

[6] Id.

[7] 44 No. 20 Construction Contracts Law Report NL 6; Tenn. Code Ann. § 66-34-704.

[8] 44 No. 20 Construction Contracts Law Report NL 6; Tenn. Code Ann. § 66-34-603.

[9] Id. 

[10] Id. 

[11] Tenn. Code Ann. § 66-34-104.

[12] Id. (emphasis added).

[13] Id.

[14] CONSTRUCTION—PROMPT PAYMENT, 1991 Tennessee Laws Public Ch. 45 (H.B. 875).

[15] Tenn. Code Ann. § 66-34-601.

[16] Tenn. Code Ann. § 66-34-701. These prohibitions are subject to some exceptions as noted in the statutes.