78R12901 ATP-F
By: Chisum, Thompson, et al. H.B. No. 541
Substitute the following for H.B. No. 541:
By: Elkins C.S.H.B. No. 541
A BILL TO BE ENTITLED
AN ACT
relating to contingent payment clauses in certain construction
contracts.
BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF TEXAS:
SECTION 1. Subchapter D, Chapter 35, Business & Commerce
Code, is amended by adding Section 35.521 to read as follows:
Sec. 35.521. AGREEMENT FOR PAYMENT OF CONSTRUCTION
SUBCONTRACTOR. (a) In this section:
(1) "Contingent payment clause" means a provision in a
contract for construction management or for the construction of
improvements to real property or the furnishing of materials for
the construction, that provides that the contingent payor's receipt
of payment from another is a condition precedent to the obligation
of the contingent payor to make payment to the contingent payee for
work performed or materials furnished.
(2) "Contingent payor" means a party to a contract
with a contingent payment clause that conditions payment by the
party on the receipt of payment from another person.
(3) "Contingent payee" means a party to a contract
with a contingent payment clause, other than an architect or
engineer, whose receipt of payment is conditioned on the contingent
payor's receipt of payment from another person.
(4) "Improvement" includes new construction,
remodeling, or repair.
(5) "Obligor" means the person obligated to make
payment to the contingent payor for an improvement.
(6) "Primary obligor" means the owner of the real
property to be improved or repaired under the contract, or the
contracting authority if the contract is for a public project. A
primary obligor may be an obligor.
(b) This section does not apply to a contract that is solely
for design services.
(c) A contingent payor or its surety may not enforce a
contingent payment clause to the extent that the nonpayment by the
contingent payor is the result of the fault of the contingent payor
or a contractor or subcontractor of the contingent payor other than
the contingent payee.
(d) Except as provided by Subsection (f) or (g), a
contingent payor or its surety may not enforce a contingent payment
clause as to work performed or materials delivered after the 10th
day after the date on which the contingent payor receives written
notice from the contingent payee objecting to the further
enforceability of the contingent payment clause as provided by this
section. The written notice is effective only if it is sent after
the 30th day after the accrual of an unpaid indebtedness, other than
retainage, owed to the contingent payee for work performed or
materials furnished under the contract between the contingent payor
and contingent payee.
(e) For purposes of Subsection (d), an unpaid indebtedness
to a contingent payee accrues only if a written request for payment
of the unpaid indebtedness is submitted by the contingent payee in a
form substantially in accordance with the contingent payee's
contract requirements for the contents of a regular progress
payment request or an invoice. The unpaid indebtedness accrues on:
(1) the last day of the month in which the work for
which payment is sought was performed or the materials for which
payment is sought were furnished, if the written request for
payment was submitted in that month; or
(2) the date on which the written request for payment
is submitted, if that date is after the end of the month in which the
work was performed or materials were furnished.
(f) A notice given by a contingent payee under Subsection
(d) does not prevent the enforcement of a contingent payment clause
if:
(1) the obligor disputes the amount owed to the
contingent payor due to the contingent payee's failure to meet its
contract requirements; and
(2) the contingent payor:
(A) substantially prevails in the dispute;
(B) gives written notice to the contingent payee
stating the nature of the dispute and specifically listing bona
fide reasons for the dispute, not later than the 10th day after the
date on which the contingent payor receives written notice from the
contingent payee objecting to further enforceability of the
contingent payment clause; and
(C) timely pays the contingent payee all amounts
owed to the contingent payee that are received from the obligor for
the contingent payee's performance.
(g) A notice given by a contingent payee under Subsection
(d) does not prevent the enforcement of a contingent payment clause
to the extent that the funds are not collectible as a result of a
primary obligor's successful assertion of a defense of sovereign
immunity, if the contingent payor has exhausted all of its rights
and remedies under its contract with the primary obligor and under
Chapter 2251, Government Code. This subsection does not:
(1) create or validate a defense of sovereign
immunity; or
(2) extend to a primary obligor a defense or right that
did not exist before the effective date of this section.
(h) On receipt of payment by the contingent payee of the
unpaid indebtedness giving rise to the written notice provided by
the contingent payee under Subsection (d), the contingent payment
clause is reinstated as to work performed or materials furnished
after the receipt of the payment, subject to the provisions of this
section.
(i) A contingent payor or its surety may not enforce a
contingent payment clause if, under Section 53.026, Property Code,
the contingent payee is considered to be in direct contractual
relationship with the obligor.
(j) A contingent payment clause may not be used as a basis
for invalidation of the enforceability or perfection of a
mechanic's lien under Chapter 53, Property Code.
(k) A contingent payor or its surety may not enforce a
contingent payment clause if the enforcement would be
unconscionable. The party asserting that a contingent payment
clause is unconscionable has the burden of pleading and proving
that the clause is unconscionable.
(l) The enforcement of a contingent payment clause is not
unconscionable if the contingent payor pleads and proves that the
contingent payor has:
(1) exercised diligence in ascertaining and
communicating in writing to the contingent payee, before the
contract in which the contingent payment clause has been asserted
becomes enforceable against the contingent payee, the financial
viability of the primary obligor and the existence of adequate
financial arrangements to pay for the improvements; and
(2) done the following:
(A) made reasonable efforts to collect the amount
owed to the contingent payor; or
(B) made or offered to make, at a reasonable
time, an assignment by the contingent payor to the contingent payee
of a cause of action against the obligor for the amounts owed to the
contingent payee by the contingent payor and offered reasonable
cooperation to the contingent payee's collection efforts, if the
assigned cause of action:
(i) is enforceable by the contingent payee
against the obligor or primary obligor; and
(ii) is not subject to defenses caused by
the contingent payor's action or failure to act.
(m) A contingent payor is considered to have exercised
diligence for purposes of Subsection (l)(1) under a contract for a
private project governed by Chapter 53, Property Code, if the
contingent payee receives in writing from the contingent payor:
(1) the name, address, and business telephone number
of the primary obligor;
(2) a description, legally sufficient for
identification, of the property on which the improvements are being
constructed;
(3) the name and address of the surety on any payment
bond provided under Subchapter I, Chapter 53, Property Code, to
which any notice of claim should be sent;
(4) a statement furnished by the primary obligor of
the amount of the loan, a summary of the terms of the loan, and the
name, address, and business telephone number of the borrowers and
lenders, if a loan has been obtained for the construction of
improvements; and
(5) a statement furnished by the primary obligor of
the amount, source, and location of funds available to pay the
balance of the contract amount if there is no loan or the loan is not
sufficient to pay for all of the construction of the improvements.
(n) A contingent payor is considered to have exercised
diligence for purposes of Subsection (l)(1) under a contract for a
public project governed by Chapter 2253, Government Code, if the
contingent payee receives in writing from the contingent payor:
(1) the name, address, and primary business telephone
number of the primary obligor;
(2) the name and address of the surety on the payment
bond provided to the primary obligor to which any notice of claim
should be sent; and
(3) a statement from the primary obligor that funds
are available and have been authorized for the full contract amount
for the construction of the improvements.
(o) A contingent payor is considered to have exercised
diligence for purposes of Subsection (l)(1) under a contract for a
public project governed by 40 U.S.C. Section 3131, if the
contingent payee receives in writing from the contingent payor:
(1) the name, address, and primary business telephone
number of the primary obligor;
(2) the name and address of the surety on the payment
bond provided to the primary obligor; and
(3) the name of the contracting officer, if known at
the time of the execution of the contract.
(p) A primary obligor shall furnish the information
described by Subsection (m), (n), or (o), as applicable, to the
contingent payor on written request.
(q) The assertion of a contingent payment clause is an
affirmative defense to a civil action for payment under a contract.
(r) This section does not affect a provision that affects
the timing of a payment in a contract for construction management or
for the construction of improvements to real property if the
payment is to be made within a time period that is reasonable.
(s) A person may not waive this section by contract or other
means. A purported waiver of this section is void.
(t) An obligor or a primary obligor may not prohibit a
contingent payor from allocating risk by means of a contingent
payment clause.
SECTION 2. (a) Section 35.521, Business & Commerce Code, as
added by this Act, applies only to a contingent payment clause under
which payment is contingent on the receipt of payment under a
contract or other agreement entered into on or after September 1,
2003.
(b) This Act takes effect September 1, 2003.