78R3631 ATP-F

By:  Chisum                                                       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 design services or for the construction of improvements to real property 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 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. (b) 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. (c) A contingent payor or its surety may not enforce a contingent payment clause as to work performed or materials delivered after the fifth 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. (d) For purposes of Subsection (c), an unpaid indebtedness to a contingent payee accrues only if a written request, in any form, for payment of the unpaid indebtedness is submitted by the contingent payee. 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. (e) On receipt of payment by the contingent payee of the unpaid indebtedness giving rise to the written notice, 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. (f) 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 person from whom the contingent payor is to receive payment. (g) 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. (h) 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. In determining whether the enforcement of the clause is unconscionable, all circumstances may be considered, including: (1) whether the person attempting to enforce the clause has made reasonable efforts to collect the amount owed to the contingent payor in light of the likelihood of collection weighed against the time, expense, and uncertainty of collection; (2) the extent to which the contingent payor has sufficient resources available to pursue collection, and whether the contingent payee was requested and agreed to share in the expense of collection; (3) the extent to which the contingent payor has made reasonable and prompt efforts to allow the contingent payee to pursue meaningful collection opportunities in situations in which the contingent payor is unable or unwilling to bring legal action for the collection of the amount owed to the contingent payor; and (4) whether the contingent payor exercised diligence in ascertaining the financial viability of the person owing payment to the contingent payor or the existence of adequate financial arrangements to pay for the improvements, before entering into the contract in which the contingent payment clause has been asserted, and the extent to which the contingent payor communicated the nature of that diligence and any financial risks to the contingent payee. (i) A contingent payor, who has not filed suit or initiated other formal legal action for collection of the amount owed to the contingent payor, has made reasonable efforts to collect the amount owed, as required by Subsection (h)(1), if a reasonable business person would consider the action futile or cost prohibitive. (j) The assertion of a contingent payment clause is an affirmative defense to a civil action for payment under a contract. The party asserting the defense must plead and prove that the contract contains a contingent payment clause that is enforceable under this section. (k) This section does not affect a provision that affects only the timing of a payment in a contract for construction management or design services or for the construction of improvements to real property if the payment is to be made within a time period that is reasonable. (l) A person may not waive this section by contract or other means. A purported waiver of this section is void. 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.