Ohio’s Prompt Pay Act has real teeth. If a higher-tier contractor is paid for work done by a lower tier and does not pay that lower tier within ten days, the higher-tier contractor may find itself paying 18% interest on the withheld funds and the lower tier’s attorneys fees. Ouch. Funds can be withheld for retainage and in the case of bona fide disputes, but, if one miscalculates and ends up liable under the statute after a lengthy battle, the interest and attorneys' fees can substantially increase the higher-tier contractor’s loss.
A recent case in Cleveland illustrates the dangers. In Frank Novak & Sons, Inc. v. A-Team, L.L.C., D.B.A. Servicemaster, the Cleveland Browns hired a contractor to clean and repair parts of the stadium damaged by flooding. The general contractor hired various subcontractors to do the work. With one subcontractor in particular, it was unclear whether the parties had entered into a written agreement or an oral agreement. It was also unclear whether they had entered two contracts or only one. After the work had started, there was additional flooding and additional work had to be done. The subcontractor contended that there were two separate contracts and that it had been paid nothing on the second one. The general contractor claimed that there was only one contract, that it had overpaid the subcontractor on it and that nothing further was owed. The court agreed with the subcontractor, finding that the general contractor had been paid for the subcontractor’s work on the second contract and had not paid the subcontractor. Oops.
As a result, the court held that the subcontractor was entitled to the interest as set forth in the statute, i.e., 18% per annum starting 10 days after the general contractor’s receipt of payment from the owner. Here, the battle went on for more than six years. As a result, the interest alone is now more than the entire amount in dispute at the outset. In addition, the statute provides that the prevailing party gets its reasonable attorneys' fees, unless the court finds it “inequitable.” So, the general contractor presumably has now paid its own attorneys for a full trial and a full appeal, and it has to pay its subcontractor’s full claim, it has to pay the interest which is now more than the full original claim, and it has the sword hanging over it of having to pay for its subcontractor’s attorneys' fees unless it can convince the trial court that paying those fees would somehow be “inequitable.” The appellate court sent the case back to the trial court to decide the attorneys' fees issue. This general contractor has probably now incurred three or four times its original exposure to liability.
A word to the wise: be careful. If a higher-tier contractor has a solid basis to withhold funds when it has been paid, the statute certainly permits that action. However, if there is a real dispute over whether that is the case, the higher-tier contractor takes a significant risk of a judge agreeing with the lower-tier contractor, thereby dramatically increasing its liability.