Report Title:

Contracts; Liens; Certificate of Completion; Prompt Payment

Description:

Provides for prompt payment to subcontractor or materialman upon completion of the work or provision of the materials required under the contract. Permits subcontractor or materialman to obtain a certificate of completion which functions as a lien on the property. Upon issuance of certificate, requires payment in full within time stipulated in the subcontract or material contract. (HB3036 HD1)

HOUSE OF REPRESENTATIVES

H.B. NO.

3036

TWENTY-THIRD LEGISLATURE, 2006

H.D. 1

STATE OF HAWAII

 


 

A BILL FOR AN ACT

 

relating to contracts.

 

BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF HAWAII:

SECTION 1. The legislature finds that this Act is necessary to address a problem within the building industry. Materialmen and subcontractors often are at the mercy of general contractors when seeking payment due them upon completion of their work or providing materials for a project. This problem is particularly serious for materialmen and subcontractors who are involved at the beginning of a project, where their work is completed or materials are furnished long before final completion of the project. In many instances, subcontractors must wait many months, even years, before receiving full payment for their completed work. Often, the subcontractors are small family owned and run businesses that lack financial resources to withstand a long delay in receiving payments owed to them for work completed. The legislature finds that there is a need to provide materialmen and subcontractors with the right to payment upon furnishing of materials or completion of their work.

The purpose of this Act is to accelerate a subcontractor's or materialman's right to payment upon completion of the subcontract or the furnishing of materials by providing for prompt payment to a subcontractor or materialman upon completion of the subcontractor's or materialman's work.

PART I

PRIVATE CONTRACTS

SECTION 2. Chapter 507, Hawaii Revised Statutes, is amended by adding three new sections to part II to be appropriately designated and to read as follows:

"§507-A Certificate of completion. (a) On the written request of a qualifying materialman or subcontractor who has completed work required under a materials contract or subcontract, the payment certifier, within thirty days after the date of the request, shall determine whether the contract or subcontract has been completed and, if the payment certifier determines that it has been completed, the payment certifier shall issue a certificate of completion stating:

(1) That the contract has been completed;

(2) The dollar amount of the materials contract or subcontract; and

(3) The dollar amount of the materials contract or subcontract that remains unpaid, which shall constitute the "certified amount" to be paid.

(b) To be a qualifying materialman or subcontractor, the subcontractor or materialman shall:

(1) Have a contract in writing for labor or materials and services;

(2) Make a written request for a certificate of completion not later than forty-five days after the date of completion of that contract for labor or materials and services; and

(3) Complete all obligations required under the materials contract or subcontract, including where applicable, providing lien releases from the subcontractor's subcontractors or materialmen, proofs of insurance, and compliance with applicable labor laws.

(c) A materialman or subcontractor is not required to seek a certificate of completion under this section and may otherwise assert a claim of lien and pursue that lien under section 507-43.

(d) If a certificate of completion is issued, the payment certifier, within seven days after issuing the certificate of completion, shall:

(1) Deliver a copy of the certificate to the owner and the general contractor, if any;

(2) Deliver a copy of the certificate of completion to the materialman or subcontractor who made the request for the certificate of completion; and

(3) Post, in a prominent place on the project, a copy of the certificate of completion.

(e) If the payment certifier fails or refuses to issue a certificate of completion to the subcontractor or materialman as provided in subsection (a), the materialman or the subcontractor, within thirty days after the payment certifier is required to issue a certificate of completion as set forth in section 507-A(a), may apply to the circuit court of the circuit in which the property is located for an order that the materials contract or subcontract has been completed. If the court is satisfied that the materials contract or the subcontract has been completed, the court shall enter an order declaring that the materials contract or the subcontract has been completed. If the payment certifier issues a certificate of completion to the subcontractor or materialman as provided in subsection (a), the owner or general contractor, within thirty days after the payment certifier is required to issue a certificate of completion as set forth in section 507-A(a), may apply to the circuit court of the circuit in which the property is located for an order that the materials contract or subcontract has not been completed. If the court is satisfied that the materials contract or subcontract has not been completed, the court shall enter an order declaring that the materials contract or subcontract has not been completed.

(f) An order under subsection (e):

(1) May be made on terms and conditions as to costs or other terms that the court considers just; and

(2) Where the order declares that the subcontract has been completed, shall have the same effect as a certificate of completion issued by a payment certifier.

(g) If an order is made under subsection (e) declaring that a contract or subcontract has been completed, the payment certifier shall comply with subsection (d) as if the order were a certificate of completion within seven days after receipt of the order by the payment certifier.

(h) The certified amount set forth in a certificate of completion or order issued under this section shall constitute a lien against the property, and the materialman or subcontractor to whom the certificate is issued may enforce that lien.

§507-B Certificate of completion payment by owner. (a) An owner, upon receipt of either a certificate of completion from a payment certifier or an order entered by a court pursuant to section 507-A, shall make payment of the certified amount set forth in that certificate or order to the materialman or subcontractor within the time stipulated in the materials contract or the subcontract.

(b) If an owner fails to make a payment as required in subsection (a), the failure to make that payment shall constitute a neglect to pay the sum upon demand, and the materialman or subcontractor may then pursue foreclosure or other remedies as provided in section 507-47 by filing an action in the circuit court of the circuit in which the property is situated.

§507-C Impact of certificate of completion upon retention of funds by owner. (a) As an exception to section 507-48, if a certificate of completion is issued on a subcontract or materials contract or an order is entered by a court pursuant to section 507-A, the owner shall be obligated to pay the entire certified amount set forth in the certificate of completion or in the order entered by the court to the materialman or subcontractor, and the owner may not withhold any amounts under section 507-48 or otherwise, unless specified in the materials contract or the subcontract. The owner shall pay the certified amount within the time stipulated in the materials contract or the subcontract.

(b) Payment of the certified amount, including any retention amounts, by an owner pursuant to subsection (a), shall fully discharge the owner of the owner's obligation to pay amounts on that subcontract or materials contract.

(c) When payment is made by an owner of a certified amount, the materialman or subcontractor, upon the request of the owner, shall execute a release of lien for that certified amount."

SECTION 3. Section 507-41, Hawaii Revised Statutes, is amended by adding four new definitions to be appropriately inserted and to read as follows:

""Certificate of completion" means a certificate under section 507-A stating that:

(1) A contract in which materials are provided by a materialman; or

(2) A subcontract in which labor or labor and materials is provided by a subcontractor;

has been completed. An order issued by the court under section 507-A shall also constitute a certificate of completion.

"Materialman" or "materialmen" means a person or persons who are in the business of the furnishing of materials.

"Payment certifier" means:

(1) The architect, engineer, or other person identified in the general contract as the person responsible for issuing a payment certificate; or

(2) If there is no person as described in paragraph (1), the owner acting alone or the owner's representative which may be the architect, engineer project manager, or other representative selected by the owner.

"Subcontractor" means a person who enters into a contract with a general contractor to provide labor or labor and materials to the owner for the improvement of real property."

SECTION 4. Section 507-47, Hawaii Revised Statutes, is amended to read as follows:

"§507-47 Demand; enforcement; foreclosure; other attachment. After demand and refusal of the amount due or upon neglect to pay the same upon demand, the lien or certificate of completion may be enforced by action filed in the circuit court of the circuit in which the property is situated. The demand may be included in the Application and Notice, and when so included, it shall not be necessary to make separate demand upon any other person. The complaint, in addition to setting forth a claim in the nature of assumpsit, may seek any remedies that the party may otherwise have a right to under existing statutory or common law. In addition, where a party has obtained a lien in accordance with section 507-43, the party may pray for the foreclosure of the lien as to which notice has been filed and may pray for any incidental relief according to the usual practice of courts of equity and according to this section in enlargement thereof. The owner or the owner's assigns on whose property the lien has attached may file a third-party action against a licensed contractor whom the owner has paid for improvements as provided for in section 444-28(g). All proceedings concerning the same improvement shall, unless good reason otherwise appears, be consolidated for trial and the court may order publication of notice of the pendency of the action. Any person having or claiming an interest in any such proceeding or in the property, including other claimants, lienors, encumbrancers, sureties, indemnitors, and the contractors license board may be joined as parties, may be interpleaded, or may be permitted to intervene, under such orders as the court may enter. Interlocutory and final decrees for the foreclosure of the liens, for deficiency judgments, and relief against the parties liable therefor, and fixing the priority of liens between the mechanics and materialmen as a group and other parties having liens against or interests in the property shall be made and entered as near as may be in accordance with the practice on foreclosure of mortgages. If the property or proceeds realized upon the foreclosure sale are insufficient to satisfy all mechanic's and materialmen's liens filed against the same, the property or proceeds shall, after satisfaction of liens for wages for labor entitled to priority under section 507-46, be divided pro rata among the liens according to the principal amounts of the liens, without regard to the order or priority in which the respective Applications and Notices have been filed or the respective actions or interventions commenced.

The court having jurisdiction of the action to foreclose the lien shall have all of the powers pertaining to courts of equity, and in addition may direct the issuance of a writ of attachment or execution upon the motion of any party against the property of any other party, in the same manner as is provided in chapter 651; provided that the writ shall only issue where the claim upon which the motion therefor is based is upon a contract, express or implied, between the parties. In addition to costs of the action, the court may allow any fee or fees for legal services rendered by the attorneys for any of the parties, and apportion the same as costs for payment by and between the parties or any of them, all as to the court seems equitable in the light of the services performed and the benefits derived therefrom by the parties respectively."

SECTION 5. Section 507-48, Hawaii Revised Statutes, is amended to read as follows:

"§507-48 Owner may retain amount due. Whenever the work or material for which a lien is filed is furnished to any contractor for use as set forth in section 507-42, the owner may retain from the amount payable to the contractor an amount sufficient to cover the amount due or to become due to the person or persons who filed the lien[.], except as provided in section 507-C."

SECTION 6. Section 507-49, Hawaii Revised Statutes, is amended by amending subsection (b) to read as follows:

"(b) Anything contained in this chapter to the contrary notwithstanding, no general contractor as defined in this chapter or [his] the subcontractor or the subcontractor's subcontractor who is required to be licensed pursuant to chapter 444, shall have lien rights or have the right to seek a certificate of completion under section 507-A, unless [such] the contractor was licensed pursuant to chapter 444 when the improvements to the real property were made or performed, and no subcontractor or subcontractor's subcontractor so licensed shall have lien rights or the right to seek a certificate of completion under section 507-A if [his] the work was subcontracted to [him] the subcontractor by a general contractor as defined in this chapter or [his] the contractor's subcontractor who was required to be licensed but was not licensed pursuant to chapter 444."

PART II

PUBLIC CONTRACTS

SECTION 7. Chapter 103, Hawaii Revised Statutes, is amended by adding two new sections to part I to be appropriately designated and to read as follows:

"§103-A Certificate of completion. (a) On the written request of a qualifying materialman or subcontractor who has completed work required under a materials contract or subcontract, the payment certifier, within thirty days after the date of the request, shall determine whether the contract or subcontract has been completed and, if the payment certifier determines that it has been completed, the payment certifier shall issue a certificate of completion stating:

(1) That the contract has been completed;

(2) The dollar amount of the materials contract or subcontract; and

(3) The dollar amount of the materials contract or subcontract that remains unpaid which shall constitute the "certified amount" to be paid.

(b) To be a qualifying materialman or subcontractor, the materialman or subcontractor shall:

(1) Have a contract in writing for labor or materials and services;

(2) Make a written request for a certificate of completion not later than forty-five days after the date of completion of that contract for materials or subcontract; and

(3) Complete all obligations required under the materials contract or subcontract, including where applicable, providing lien releases from the subcontractor's subcontractors or materialmen, proofs of insurance, and compliance with applicable labor laws.

(c) A materialman or subcontractor is not required to seek a certificate of completion under this section and may otherwise assert its rights as set forth in this chapter.

(d) If a certificate of completion is issued, the payment certifier shall, within seven days after issuing the certificate of completion:

(1) Deliver a copy of the certificate to the paying agency, the general contractor, and surety, if any;

(2) Deliver a copy of the certificate of completion to the materialman or subcontractor who made the request for certificate of completion; and

(3) Post, in a prominent place on the improvement, a copy of the certificate of completion.

(e) If the payment certifier fails or refuses to issue a certificate of completion as provided in subsection (a), the materialman or the subcontractor, within thirty days after the payment certifier is required to issue a certificate of completion as set forth in section 103-A(a), may apply to the circuit court of the circuit in which the property is located for an order that the materials contract or subcontract has been completed. If the court is satisfied that the materials contract or the subcontract has been completed, the court shall enter an order declaring that the materials contract or the subcontract has been completed. If the payment certifier issues a certificate of completion to the subcontractor or materialman as provided in subsection (a), the paying agency or general contractor, within thirty days after the payment certifier is required to issue a certificate of completion as set forth in section 103-A(a), may apply to the circuit court of the circuit in which the property is located for an order that the materials contract or subcontract has not been completed. If the court is satisfied that the materials contract or subcontract has not been completed, the court shall enter an order declaring that the materials contract or subcontract has not been completed.

(f) An order, under subsection (e):

(1) May be made on terms and conditions as to costs or other terms that the court considers just; and

(2) Where such order declares that the subcontract has been completed, shall have the same effect as a certificate of completion issued by a payment certifier.

(g) If an order is made under subsection (e) declaring that a subcontract has been completed, the payment certifier shall comply with subsection (d) as if the order were a certificate of completion within seven days after receipt of the order by the payment certifier.

§103-B Certificate of completion by paying agency. (a) A paying agency, upon receipt of either a certificate of completion from a payment certifier or an order entered by a court pursuant to section 103-A, within the time stipulated in the subcontract or materials contract, shall make payment of the certified amount set forth in that certificate or order to the materialman or subcontractor.

(b) If a paying agency fails to make a payment as required in subsection (a), the failure to make that payment shall constitute a neglect to pay the sum upon demand, and the materialman or subcontractor may then pursue any remedies as provided for in this chapter or section 103D-324 by filing an action in the circuit court of the circuit in which the property is situated. Presentation of the certificate of completion to the paying agency shall constitute written notice for the purposes of section 103D-124."

SECTION 8. Section 103D-104, Hawaii Revised Statutes, is amended by adding two new definitions to be appropriately inserted and to read as follows:

""Paying agency" means the purchasing agency or such other agency that is responsible for payment of a contract as described in section 103-10.

"Payment certifier" means:

(1) The architect, engineer, or other person identified in the general contract as the person responsible for issuing a payment certificate; or

(2) If there is no person as described in paragraph (1), the paying agency acting alone or the paying agency's representative, which may be the architect, engineer project manager, or other representative selected by the paying agency."

SECTION 9. Section 103-1.5, Hawaii Revised Statutes, is amended to read as follows:

"[[]§103-1.5[]] Definitions. The definitions of chapter 103D and chapter 507 shall apply to this chapter unless the context clearly requires otherwise."

SECTION 10. Section 103-32.1, Hawaii Revised Statutes, is amended to read as follows:

"§103-32.1 Contract provision for retainage; subcontractors. (a) Any public contract may include a provision for the retainage of a portion of the amount due under the contract to the contractor to insure the proper performance of the contract; provided that:

(1) The sum withheld by the procurement officer from the contractor shall not exceed five per cent of the total amount due the contractor and that after fifty per cent of the contract is completed and progress is satisfactory, no additional sum shall be withheld; provided further that if progress is not satisfactory, the contracting officer may continue to withhold as retainage, sums not exceeding five per cent of the amount due the contractor; and

(2) The retainage shall not include sums deducted as liquidated damages from moneys due or that may become due the contractor under the contract.

(b) Where a subcontractor has provided evidence to the contractor of:

(1) A valid performance and a payment bond for the project that is acceptable to the contractor and executed by a surety company authorized to do business in this State;

(2) Any other bond acceptable to the contractor; or

(3) Any other form of collateral acceptable to the contractor;

the retention amount withheld by the contractor from its subcontractor shall be the same percentage of retainage as that of the contractor. This subsection shall also apply to the subcontractors who subcontract work to other subcontractors.

(c) Subsection (b) notwithstanding, where a subcontractor or materialman presents to the paying agency a certificate of completion, as set forth in section 103-10, the paying agency shall be obligated to pay to the subcontractor or materialman the entire certified amount set forth in the certificate of completion no later than the time stipulated in the subcontract or materials contract and the paying agency may not withhold any amounts as retainage.

(d) Payment of the certified amount, including any retained amounts by a paying agency pursuant to this section, shall fully discharge the paying agency and the State or county from any further obligation to pay amounts on that subcontract or materials contract.

(e) For purposes of calculating the amount of retainage that may be withheld by the procurement officer from a general contractor pursuant to section 103-32-1(1), the procurement officer shall take into consideration amounts paid to subcontractors on certificates of completion and shall adjust the retainage it withholds from the general contractor accordingly."

SECTION 11. Section 103D-324, Hawaii Revised Statutes, is amended to read as follows:

"§103D-324 Contract performance and payment bonds. (a) Unless the policy board determines otherwise by rules, the following bonds or security shall be delivered to the purchasing agency and shall become binding on the parties upon the execution of the contract if the contract which is awarded exceeds $25,000 and is for construction, or the purchasing agency secures the approval of the chief procurement officer:

(1) A performance bond in a form prescribed by the rules of the policy board, executed by a surety company authorized to do business in this State or otherwise secured in a manner satisfactory to the purchasing agency, in an amount equal to one hundred per cent of the price specified in the contract;

(2) A payment bond in a form prescribed by the rules of the policy board, executed by a surety company authorized to do business in this State or otherwise secured in a manner satisfactory to the purchasing agency, for the protection of all persons supplying labor and material to the contractor for the performance of the work provided for in the contract. The bond shall be in an amount equal to one hundred per cent of the price specified in the contract; or

(3) A performance and payment bond which satisfies all of the requirements of paragraphs (1) and (2).

(b) The policy board may adopt rules that authorize the head of a purchasing agency to reduce the amount of performance and payment bonds.

(c) Nothing in this section shall be construed to limit the authority of the chief procurement officer to require a performance bond or other security in addition to those bonds, or in circumstances other than specified in subsection (a).

(d) Every person who has furnished labor or material to the contractor for the work provided in the contract, in respect of which a payment bond or a performance and payment bond is furnished under this section, and who has not been paid amounts due therefor before the expiration of a period of ninety days after the day on which the last of the labor was done or performed or material was furnished or supplied, for which such a claim is made, may institute an action for the amount, or balance thereof, unpaid at the time of the institution of the action against the contractor and its sureties, on the payment bond or the performance and payment bond, and have their rights and claims adjudicated in the action, and judgment rendered thereon; subject to the State's priority on the bonds. If the full amount of the liability of the sureties on the payment bond is insufficient to pay the full amount of the claims, then, after paying the full amount due the State, the remainder shall be distributed pro rata among the claimants.

As a condition precedent to any such suit, written notice shall be given to the paying agency, contractor, and surety, within ninety days from the date on which the person did or performed the last labor or furnished or supplied the last of the material for which claim is made, stating with substantial accuracy the amount claimed and the name of the party to whom the material was furnished or supplied or for whom the labor was done or performed.

The written notice shall be served by registered or certified mailing of the notice, to the paying agency, contractor, and surety, at any place they maintain an office or conduct their business, or in any manner authorized by law to serve summons.

(e) Every suit instituted under subsection (d) shall be brought in the circuit court of the circuit in which the project is located, but no such suit shall be commenced after the expiration of one year after the day on which the last of the labor was performed or material was supplied for the work provided in the contract. The obligee named in the bond need not be joined as a party in any such suit.

The terms "labor" and "material" have the same meanings in this section as the terms are used in section 507-41.

(f) A subcontractor or materialman may also seek a certificate of completion from the paying agency by following the procedures set forth in sections 103-A and 103-B.

(g) In the event that a subcontractor or materialman obtains a certificate of completion as described in section 103-A, the subcontractor or materialman may present the certificate of completion to the paying agency for payment.

(h) A paying agency presented with a certificate of completion shall make payment of the certified amount no later than the time stipulated in the subcontract or materials contract.

(i) In the event that a paying agency presented with a certificate of completion fails to make payment as provided in subsection (h), the subcontractor or materialman who has not been paid the certified amount may institute an action for the amount or balance thereof, unpaid at the time of the institution of the action against the general contractor and, if a payment bond or performance bond is issued for the project, on those bonds, and may have all rights and claims adjudicated in the action and judgment rendered, subject to the State's priority on any bonds. Presentation of the certificate of completion to the paying agency, general contractor, and surety, if any, shall constitute written notice as set forth in section 103D-324(d)."

SECTION 12. In codifying the new sections added by sections 2 and 7 of this Act, the revisor of statutes shall substitute appropriate section numbers for the letters used in designating the new sections in this Act.

SECTION 13. Statutory material to be repealed is bracketed and stricken. New statutory material is underscored.

SECTION 14. This Act shall take effect on January 1, 2050.