SRC-AMY S.B. 256 78(R)   BILL ANALYSIS


Senate Research Center   S.B. 256
78R3631 ATP-FBy: Harris
Business & Commerce
4/4/2003
As Filed


DIGEST AND PURPOSE 

Currently, construction contracts generally contain contingent payment
clauses, which provide that a general contractor's payment to a
subcontractor during construction is contingent upon the general
contractor being paid by the owner.  As proposed, S.B. 256 establishes new
requirements for implementing contingent payments, including when a
contingent payment is enforceable and a justifiable defense in a civil
suit, and when enforcement of a contingent payment is prohibited. 

RULEMAKING AUTHORITY

This bill does not expressly grant any additional rulemaking authority to
a state officer, institution, or agency. 

SECTION BY SECTION ANALYSIS

SECTION 1.  Amends Chapter 35D, Business & Commerce Code, by adding
Section 35.521, as follows:  

Sec. 35.521. AGREEMENT FOR PAYMENT OF CONSTRUCTION SUBCONTRACTOR. (a)
Defines "contingent payment clause," "contingent payor," "contingent
payee," and "improvement."  

(b) Prohibits a contingent payor or its surety from enforcing a contingent
payment clause to the point of nonpayment by reason of an individual other
than the contingent payee. 

(c) Prohibits a contingent payor or its surety from enforcing a contingent
payment clause, for work performed or materials delivered, past the fifth
day after the receipt of a letter objecting to nonpayment. Provides that
the objection letter must be sent  only after the 30th day after accrual
of unpaid indebtedness, other than retainage. 

(d) Provides submission of a written request for payment as a prerequisite
for accrual of unpaid indebtedness and establishes the guidelines
governing accrual. 

(e) Provides for the reinstatement of the contingent clause, after payment
is made, for work performed and materials provided after receipt of
payment, subject to the provisions of this section. 

(f) Prohibits a contingent payor or its surety from enforcing a contingent
payment clause if, under Section 53.026, Property Code, the contingent
payee has a direct relationship with the person paying the contingent
payor. 

(g) Prohibits using a contingent payment clause as the basis for
invalidating the enforcability or perfection of a mechanic's lien under
Chapter 53, Property Code. 

(h) Prohibits a contingent payor or its surety from enforcing a contingent
payment clause if doing so would be unconscionable, the burden of proof of
which lies with the party asserting that enforcement would be
unconscionable. Sets forth  circumstances authorized to be considered in
determination of whether enforcement of a payment clause would be
unconscionable. 

(i) Establishes that a contingent payor, who has not initiated legal
proceedings, has made a reasonable effort, as required by Subsection
(h)(1), if a reasonable business person would consider the action futile
or cost prohibitive. 

(j) Establishes that the assertion of a contingent payment clause is a
justifiable defense to a civil action for payment under contract and that
the burden of proof falls to the defendant. 

(k) Exempts from this section a provision addressing timing of payment for
certain services if the timing is reasonable.  

(l) Prohibits waiving this section by any means and provides that a
purported waiver is void. 

SECTION 2. (a) Makes application of this Act prospective.
           
           (b) Effective date: September 1, 2003.