By: Deuell  S.B. No. 324
         (In the Senate - Filed January 25, 2007; February 14, 2007,
  read first time and referred to Committee on Business and Commerce;
  February 21, 2007, reported favorably by the following vote:  Yeas 9,
  Nays 0; February 21, 2007, sent to printer.)
 
 
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 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.
               (2)  "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.
               (3)  "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.
               (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)  A contingent payor or its surety may not enforce a
  contingent payment clause to the extent that the obligor's
  nonpayment to the contingent payor is the result of the contractual
  obligations of the contingent payor not being met, unless the
  nonpayment is the result of the contingent payee's failure to meet
  the contingent payee's contractual requirements.
         (c)  Except as provided by Subsection (f), a contingent payor
  or its surety may not enforce a contingent payment clause as to work
  performed or materials delivered after 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 and the notice becomes effective as provided by
  Subsection (d). The contingent payee may send written notice only
  after the 45th day after the date the contingent payee submits a
  written request for payment to the contingent payor that is 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.
         (d)  For purposes of Subsection (c), the written notice
  becomes effective on the latest of:
               (1)  the 10th day after the date the contingent payor
  receives the notice;
               (2)  the eighth day after the date interest begins to
  accrue against the obligor under:
                     (A)  Section 28.004, Property Code, under a
  contract for a private project governed by Chapter 28, Property
  Code; or
                     (B)  31 U.S.C. Section 3903(a)(6), under a
  contract for a public project governed by 40 U.S.C. Section 3131; or
               (3)  the 11th day after the date interest begins to
  accrue against the obligor under Section 2251.025, Government Code,
  under a contract for a public project governed by Chapter 2251,
  Government Code.
         (e)  A notice given by a contingent payee under Subsection
  (c) does not prevent enforcement of a contingent payment clause if:
               (1)  the obligor has a dispute under Chapter 28,
  Property Code, Chapter 2251, Government Code, or 31 U.S.C. Chapter
  39 as a result of the contingent payee's failure to meet the
  contingent payee's contractual requirements; and
               (2)  the contingent payor gives notice in writing to
  the contingent payee that the written notice given under Subsection
  (c) does not prevent enforcement of the contingent payment clause
  under this subsection and the contingent payee receives the notice
  under this subdivision not later than the later of:
                     (A)  the fifth day before the date the written
  notice from the contingent payee under Subsection (c) becomes
  effective under Subsection (d); or
                     (B)  the fifth day after the date the contingent
  payor receives the written notice from the contingent payee under
  Subsection (c).
         (f)  A written notice given by a contingent payee under
  Subsection (c) 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.
         (g)  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 (c), 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.
         (h)  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.
         (i)  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.
         (j)  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 proving that the clause
  is unconscionable.
         (k)  The enforcement of a contingent payment clause is not
  unconscionable if the contingent payor:
               (1)  proves that the contingent payor has 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)  has 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 is not subject to defenses caused by the
  contingent payor's action or failure to act.
         (l)  A cause of action brought on an assignment made under
  Subsection (k)(2)(B) is enforceable by a contingent payee against
  an obligor or a primary obligor.
         (m)  A contingent payor is considered to have exercised
  diligence for purposes of Subsection (k)(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)  if a loan has been obtained for the construction of
  improvements:
                     (A)  a statement, furnished by the primary obligor
  and supported by reasonable and credible evidence from all
  applicable lenders, of the amount of the loan;
                     (B)  a summary of the terms of the loan;
                     (C)  a statement of whether there is foreseeable
  default of the primary obligor; and
                     (D)  the name, address, and business telephone
  number of the borrowers and lenders; and
               (5)  a statement, furnished by the primary obligor and
  supported by reasonable and credible evidence from all applicable
  banks or other depository institutions, 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 (k)(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 (k)(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) or (n), as applicable, to the
  contingent payor not later than the 30th day after the date the
  primary obligor receives a written request for the information. If
  the primary obligor fails to provide the information under the
  written request, the contingent payor, the contingent payee, and
  their sureties are relieved of the obligation to initiate or
  continue performance of the construction contracts of the
  contingent payor and contingent payee.
         (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 reasonable period.
         (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.
         (u)  This section does not apply to a contract that is solely
  for:
               (1)  design services;
               (2)  the construction or maintenance of a road,
  highway, street, bridge, utility, water supply project, water
  plant, wastewater plant, water and wastewater distribution or
  conveyance facility, wharf, dock, airport runway or taxiway,
  drainage project, or related type of project associated with civil
  engineering construction; or
               (3)  improvements to or the construction of a structure
  that is a:
                     (A)  detached single-family residence;
                     (B)  duplex;
                     (C)  triplex; or
                     (D)  quadruplex.
         SECTION 2.  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,
  2007.
         SECTION 3.  This Act takes effect September 1, 2007.
 
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