To pay or not to pay…
Quality of work aside, there is little else more important to a construction contractor than being paid.
Within the last few years, we have seen significant developments in Louisiana law concerning owner payment on construction projects. Some of the developments stem from changes in Louisiana statutory authority – for example, Louisiana Revised Statute 38:2191, governing owner payment on public works projects.
Courts applying statutes such as La. R.S. 38:2191 have seen fit to look beyond payment provisions within construction contracts and instead apply statutory provisions to force payment where payment might otherwise not be due. Court decisions as such – indeed, the entire statutory scheme and application – may strike an owner as government intervention where government doesn’t belong, as, in the owner/contractor payment context, the contracting parties are not dealing with issues inherent in “prompt payment” statutes (statutes aimed at preventing misappropriation of funds, as opposed to simple payment disputes). From the contractor’s point of view, the contractor-centric payment statutes and related court decisions are manna.
Notwithstanding the foregoing, the Louisiana Fourth Circuit Court of Appeal in Hamp's Constr., L.L.C. v. 1031 Canal, L.L.C. strictly enforced certain payment and withholding provisions within a construction contract, reversing the trial court and allowing an owner disputing payment to withhold payment from a demolition contractor. (Note: in the appellate decision, the court notes that the owner was also serving as its own general contractor, and subcontracted with the demolition subcontractor, although it is not apparent from the court decision that this somewhat unique fact pattern had any effect upon the court’s ruling.)
In Hamp’s, the demolition contractor filed suit in Civil District Court in New Orleans seeking payment for completed demolition work. During the demolition work, a common wall between the demolition site and the neighboring property partially collapsed, and the owner took the position that the demolition contractor was at fault for the collapse. In connection with the wall collapse, the owner withheld $117,040.00 of the original contract price, urging that the withheld amount was proper as “setoff” against the amount which might otherwise be owed to the contractor. The owner asserted “setoff” as an affirmative defense against the claim of the demolition contractor, and claimed the same amount in the form of a reconventional demand in the litigation.
In the trial court, the demolition contractor filed a motion for summary judgment for the full amount withheld, which was granted, although the trial court did not issue written reasons for its ruling. The owner appealed, citing its dispute with the demolition contractor in regard to the collapsed wall.
For its part, the demolition contractor urged, first, that the setoff would not be available to the owner unless the setoff was both “liquidated” (as to amount) and “presently due,” citing to Louisiana Civil Code article 1893 on the Louisiana legal principle of “compensation” as a matter of law (to be contrasted with “compensation” as a matter of agreement between the parties, discussed below). Second, the demolition contractor posited that the general contract for the demolition expressly excluded setoff in the manner contemplated by the project owner – although the Court of Appeal refused this argument. The Court of Appeal noted that the argument not only dealt with language merely stricken from the contract between the parties, but also that the stricken language dealt with offset in another context (to wit: the ability of the owner to offset amounts the contractor might owe the owner in regard to separate and distinct unrelated contracts between the parties).
As is customary in summary judgment proceedings, the Court of Appeal indicated that the owner – in order to defeat summary judgment – was required to offer up at least some proof (even if disputed by the demolition contractor) of the owner’s entitlement to the setoff. Proof of the dispute regarding the collapsed wall was simple enough for the owner to provide. However, the Court of Appeal appears to have required more from the owner, premising its eventual decision in large part on language within the demolition contract which specifically provided for the type of setoff the owner was asserting. The appellate court focused its decision on specific provisions within the contract which entitled the owner to “withhold payments” for, among other things, “damages incurred to remedy a default” by the demolition contractor.
In connection with the contractual setoff provision cited by the owner, the owner pointed the court to Louisiana Civil Code article 1901, dealing with “compensation” by agreement of the parties Article 1901 is a Civil Code article which, by its very terms, trumps earlier-cited article 1893 on the issue of “compensation” – when the parties have contractually agreed, for example, to a setoff provision. The Court of Appeal ruled in favor of the owner, noting that “the possibility that contractual provisions in the [contract] would allow setoff to occur coupled with an affidavit that supported a claim of default…is enough to defeat summary judgment.” The Court of Appeal reversed the trial court, and remanded the case back to the trial court for further proceedings.
Although it is not expressly so stated in the Hamp’s appellate opinion, one can infer from the decision of the Court of Appeal that, had the express language in the contract allowing for setoff been absent, the Court of Appeal – notwithstanding the bona fide dispute concerning the collapsed wall – would have affirmed the summary judgment in favor of the demolition contractor and simply required the owner to attempt to recover back those monies through the owner’s reconventional demand against the contractor.
The full text of the court decision in Hamp’s can be found here: https://law.justia.com/cases/louisiana/fourth-circuit-court-of-appeal/2019/2018-ca-0686.html
Hamp's Constr., L.L.C. v. 1031 Canal, L.L.C., 2018-0686 (La. App. 4 Cir 02/27/19), 2019 La. App. LEXIS 355