Tennessee Prompt Payment Guide and FAQs

This chapter shall be known and may be cited as the “Prompt Pay Act of 1991.”

As used in this chapter, unless the context or subject matter indicates another meaning, the words and phrases defined in § 66-11-101 have the same meaning as set out in that section and are incorporated in this chapter by reference.

(a) All construction contracts on any project in this state, both public and private, may provide for the withholding of retainage; provided, however, that the retainage amount may not exceed five percent (5%) of the amount of the contract.

(b) The owner, whether public or private, shall release and pay all retainages for work completed pursuant to the terms of any contract to the prime contractor within ninety (90) days after completion of the work or within ninety (90) days after substantial completion of the project for work completed, whichever occurs first. As used in this subsection (b), “work completed” means the completion of the scope of the work and all terms and conditions covered by the contract under which the retainage is being held. The prime contractor shall pay all retainages due any remote contractor within ten (10) days after receipt of the retainages from the owner. Any remote contractor receiving the retainage from the prime contractor shall pay to any lower-tier remote contractor all retainages due the lower-tier remote contractor within ten (10) days after receipt of the retainages.

(c) Any default in the making of the payments is subject to those remedies provided in this part.

(d) If an owner or prime contractor withholds retainage that is for the use and benefit of the prime contractor or its remote contractors pursuant to § 66-34-104(a) and (b), then neither the prime contractor nor any of its remote contractors are required to deposit additional retained funds into an escrow account in accordance with § 66-34-104(a) and (b).

(e)

(1) It is an offense for a person, firm, or corporation to fail to comply with subsection (a) or (b) or § 66-34-104(a).

(2)

(A) A violation of this subsection (e) is a Class A misdemeanor, subject to a fine only of three thousand dollars ($3,000).

(B) Each day a person, firm, or corporation fails to comply with subsection (a) or (b) or § 66-34-104(a) is a separate violation of this subsection (e).

(C) Until the violation of this subsection (e) is remediated by compliance, the punishment for each violation is consecutive to all other violations.

(3) In addition to the fine imposed pursuant to subdivisions (e)(2)(A) and (B), the court shall order restitution be made to the owner of the retained funds. In determining the appropriate amount of restitution, the formula stated in § 40-35-304 must be used.

(4) This subsection (e) does not apply to the state, any department, board, or agency thereof, including the University of Tennessee, all counties and municipalities, and all departments, boards, or agencies thereof, including all school and education boards, and any other subdivision of the state.

(a) Whenever, in any contract for the improvement of real property, a certain amount or percentage of the contract price is retained, that retained amount must be deposited in a separate, interest-bearing, escrow account with a third party which must be established upon the withholding of any retainage.

(b) As of the time of the withholding of the retained funds, the funds become the sole and separate property of the prime contractor or remote contractor to whom they are owed, subject to the rights of the person withholding the retainage in the event the prime contractor or remote contractor otherwise entitled to the funds defaults on or does not complete its contract.

(c) If the party withholding the retained funds fails to deposit the funds into an escrow account as provided in this section, then the party shall pay the owner of the retained funds an additional three hundred dollars ($300) per day as damages, not as a penalty, for each and every day that the retained funds are not deposited into an escrow account. Damages accrue from the date retained funds were first withheld and continue to accrue until placed into a separate, interest-bearing escrow account or otherwise paid.

(d) The party with the responsibility for depositing the retained amount in a separate, interest-bearing escrow account with a third party has the affirmative duty to provide written notice that the party has complied with this section to any prime contractor upon withholding the amount of retained funds from each and every application for payment, including:

(1) Identification of the name of the financial institution with which the escrow account has been established;

(2) Account number; and

(3) Amount of retained funds that are deposited in the escrow account with the third party.

(e) Upon satisfactory completion of the contract, to be evidenced by a written release by the owner, prime contractor, or remote contractor owing the retainage, all funds accumulated in the escrow account together with all interest on the account must be paid immediately to the prime contractor or remote contractor to whom the funds and interest are owed.

(f) If the owner, prime contractor, or remote contractor, as applicable, fails or refuses to execute the release provided for in subsection (e), then the prime contractor or remote contractor, as applicable, may seek equitable relief, including injunctive relief, as provided in § 66-34-602, against the owner, prime contractor, or remote contractor. Relief may not be sought against the person holding the retainage as an escrow agent, and that person bears no liability for the nonpayment of the retainage; however, a court may issue an order to the person holding retainage to pay any sums held in trust pursuant to § 66-34-205. The person paying the sums pursuant to a court order bears no liability to the owner, prime contractor, or remote contractor for the payment. All other claims, demands, disputes, controversies, and differences that may arise between the owner, prime contractor, or prime contractors, and remote contractors may be, upon written agreement of all parties concerned, settled by arbitration conducted pursuant to the Uniform Arbitration Act, compiled in title 29, chapter 5, part 3, or the Federal Arbitration Act ( 9 U.S.C. § 1 et seq.), as may be applicable.

(g) Subsections (c), (d), and (j) do not apply to the state and any department, board, or agency thereof, including the University of Tennessee; counties and municipalities, and all departments, boards, or agencies thereof, including all school and education boards; and any other subdivision of the state.

(h) This section applies to all prime contracts and all subcontracts thereunder for the improvement of real property when the contract amount of the prime contract is five hundred thousand dollars ($500,000) or greater, notwithstanding the amount of the subcontracts.

(i) Compliance with this section is mandatory, and shall not be waived by contract.

(j) Failure to deposit the retained funds into an escrow account as provided in this section, within seven (7) days of receipt of written notice regarding the failure, is a Class A misdemeanor.

Performance by a prime contractor in accordance with a written contract with an owner for improvement of real property entitles the prime contractor to payment from the owner.

(a) If a prime contractor has performed in accordance with the prime contractor’s written contract with the owner, then the owner shall pay to the prime contractor the full amount earned by the prime contractor, less only those amounts withheld in accordance with § 66-34-203. The payment must be made in accordance with the schedule for payments established within the contract and within thirty (30) days after application for payment is timely submitted by the prime contractor to the owner, in accordance with the schedule.

(b) Failure of an architect, engineer, or other agent employed by the owner to review and approve an application for payment for work which has been performed in accordance with the contract does not excuse the owner from making payment in accordance with this chapter. This section does not require payment for work not performed if an architect, engineer, or other agent has certified that a contractor has not completed performance for a portion of work covered by the application for payment.

This chapter does not prevent the owner from reasonably withholding payment or a portion of a payment to the prime contractor, as long as the withholding is in accordance with the written contract between the owner and the prime contractor. The owner may also withhold a reasonable amount of retainage as specified in the written contract between the owner and the prime contractor, as long as the retainage amount does not exceed five percent (5%) of the amount of the contract.

When an owner:

(1) Has received a use and/or occupancy permit for an improvement from a governmental agency lawfully issuing such permit;

(2) Has received a certificate of substantial completion from an architect or engineer charged with supervision of the construction of an improvement; or

(3) Begins to use or could have begun to use an improvement;
the owner shall, after any such event and pursuant to the terms of the written contract, pay to the prime contractor all retainage the owner may have withheld pursuant to the written contract, except any sum which the owner may reasonably withhold in accordance with the written contract between the owner and the prime contractor; the retainage must be paid within ninety (90) days after the date of the occurrence of an event included in subdivision (1), (2) or (3).

(a) Any sums allocated by the owner or provided or committed to the owner by a third party that are intended to be used as payment for improvements made to real property by virtue of a written contract between the owner and the prime contractor must be held by the owner or third party in trust for the benefit and use of the prime contractor and its remote contractors, and are subject to all legal and equitable remedies.

(b) The presence of an otherwise valid agreement to arbitrate does not prevent a prime contractor or remote contractor from seeking equitable relief, including injunctive relief, as permitted by § 66-34-602 against any owner, prime contractor, or remote contractor.

(c) The bankruptcy or insolvency of any party is not a valid defense for the failure of an owner or other third party that controls or holds those sums described in subsection (a), as well as all retainage, to release those sums when they are otherwise due.

(d) This section does not apply to the state, including its departments, boards, or commissions, or to any institution of higher education.

Performance by a remote contractor in accordance with a written contract with a prime contractor for improvement of real property entitles the remote contractor to payment from the prime contractor.

(a) If a remote contractor has performed in accordance with the remote contractor’s written contract with the prime contractor, then the prime contractor shall pay to the remote contractor the full amount earned by the remote contractor, subject only to any condition precedent for payment clause in the contract, and less only those amounts withheld in accordance with § 66-34-303. The payment must be made in accordance with the schedule for payments established within the contract and within thirty (30) days after application for payment is timely submitted by the remote contractor to the prime contractor, in accordance with the schedule.

(b) The prime contractor shall also pay the remote contractor its pro rata share of any interest provided for in § 66-34-601 that has been received by the prime contractor.

This chapter does not prevent the prime contractor from reasonably withholding payment or a portion of payment to the remote contractor, as long as the withheld payment is in accordance with the written contract between the prime contractor and the remote contractor. The prime contractor may also withhold a reasonable amount of retainage as specified in the written contract between the prime contractor and remote contractor; except, that the retainage amount must not exceed five percent (5%) of the amount of the contract.

Any sums received by the prime contractor as payment for work, services, equipment, and materials supplied by the remote contractor for improvements to real property must be held by the prime contractor in trust for the benefit and use of the remote contractor, and are subject to all legal and equitable remedies.

A remote contractor contracting in writing with another remote contractor for the improvement of real property shall make payment to the other remote contractor in accordance with part 3 of this chapter.

An architect or engineer furnishing design or contract administration services to an owner, prime contractor, or remote contractor for the improvement of real property is entitled to payment in accordance with part 2 of this chapter, if the architect or engineer contracts in writing with the owner; or in accordance with part 3 of this chapter, if the architect or engineer contracts in writing with a prime contractor or remote contractor.

Any payment not made in accordance with this chapter accrues interest, from the date due until the date paid, at the rate of interest for delinquent payments provided in written contract or, if no interest rate is specified in a written contract, then one and one-half percent (1.5%) per month.

(a)

(1) A prime contractor who has not received payment from an owner, or a remote contractor who has not received payment from a prime contractor or other remote contractor, in accordance with this chapter, or any prime contractor or remote contractor that intends to seek to recover funds as permitted by § 66-34-205 and this section, shall notify the party failing to make payment of the notifying party’s intent to seek relief against that party as provided in this chapter.

(2) The notification must be made by registered or certified mail, return receipt requested, or by another commercial delivery service that provides written confirmation of delivery.

(3) If the notified party does not, within ten (10) calendar days after receipt of the notice, make payment or provide to the notifying party a response giving adequate legal reasons for failure of the notified party to make payment, then the notifying party may, in addition to all other remedies available at law or in equity, sue for equitable relief, including injunctive relief, for continuing violations of this chapter in the chancery court of the county in which the real property is located.

(4) The failure to make the only payment due under the contract may be considered a continuing violation under this chapter.

(5) The notification required by this part may be sent separately or as part of any notice of nonpayment or other notice required under the contract and may be in substantially the following form:

This letter shall serve as notice pursuant to the Tennessee Prompt Pay Act, Tenn. Code Ann. §§ 66-34-101 et seq., of [prime contractor or remote contractor]’s intent to seek relief under the Prompt Pay Act. [Prime contractor or remote contractor] furnished [description of labor, materials, or services furnished] in furtherance of improvements to real property located at [property description] pursuant to its written contract with [lender, owner, prime contractor, or remote contractor]. [Prime contractor or remote contractor] first furnished labor, materials, or services on [insert first date] and [“is still continuing to perform” or “last furnished labor, materials, or services on (insert date)”]. If [owner, prime contractor, and/or remote contractor] fail(s) to make payment, arrange for payment, or provide a response setting forth adequate legal reasons for the failure to make payment to [prime contractor or remote contractor] within ten (10) days of your receipt of this letter, then [prime contractor or remote contractor] may, in addition to all other remedies at law or in equity, file a lawsuit for equitable relief, including injunctive relief, for continuing violations of this chapter.

(b)

(1) If an owner does not make payment to a prime contractor or furnish a response setting forth adequate legal reasons for the owner’s failure to make payment within ten (10) days of receipt of the notice required by subsection (a), then the prime contractor may stop work until payment is received or until the owner provides a response setting forth adequate legal reasons for the owner’s failure to make payment, as long as the prime contractor is not otherwise in default of the written contract. If, in accordance with subsection (a), the owner makes payment or provides a response setting forth adequate legal reasons for the failure to pay the prime contractor, then the prime contractor shall not stop work pursuant to this section.

(2) If a prime contractor does not make payment to a remote contractor or furnish a response setting forth adequate legal reasons for the prime contractor’s failure to make payment within ten (10) days of receipt of the notice required by subsection (a), then the remote contractor may stop work until payment is received or until the prime contractor provides a response setting forth adequate legal reasons for the prime contractor’s failure to make payment, as long as the remote contractor is not otherwise in default of the written contract. If, in accordance with subsection (a), the prime contractor makes payment or provides a response setting forth adequate legal reasons for the failure to pay the remote contractor, then the remote contractor shall not stop work pursuant to this section.

(c) Any work stoppage by a prime contractor or a remote contractor in accordance with this section entitles the prime contractor or remote contractor to an extension of the contract schedule, if any, equal to the length of the work stoppage.

(d) Reasonable attorney’s fees may be awarded against the nonprevailing party if the nonprevailing party acted in bad faith.

(e) A bond in the amount claimed or ordered to be paid must be filed with good sureties to be approved by the clerk prior to the issuance of any injunctive relief.

(a) In addition to any rights provided for under any contract:

(1) Prior to visible commencement of operations, and upon written request by a prime contractor, the owner shall furnish a prime contractor reasonable evidence the own er has procured a loan, which may be secured by a mortgage or other encumbrance, or has otherwise made financial arrangements sufficient to make all payments in accordance with the contract;

(2) After visible commencement of operations, a prime contractor or a remote contractor may, upon the owner’s failure to make payments as required by the written contract, provide notice in accordance with § 66-34-602(a). Included within the notice, a prime contractor or remote contractor may request that the owner provide reasonable evidence that the owner has made financial arrangements sufficient to fulfill its obligation to make all payments in accordance with the written contract;

(3) An owner shall provide a response to a demand for reasonable assurances within ten (10) days of receipt of the request that:

(A) Provides reasonable evidence that the owner has made financial arrangements sufficient to fulfill the owner’s obligation to make all payments in accordance with the written contract, including the information set forth in § 66-34-104(d); or

(B) Provides adequate legal reasons for the owner’s failure to make payment of the sums owing to the requesting party;

(4) If an owner responds to a demand for adequate assurance with reasonable evidence that the owner has made financial arrangements sufficient to fulfill the owner’s obligation to make all payments in accordance with the written contract, then the owner shall not materially vary the owner’s financial arrangements from those disclosed under this section without prior notice to the prime contractor or remote contractor; and

(5) A demand for reasonable assurances may be sent separately or as part of any notice of nonpayment, notice pursuant to § 66-34-602(a), or other notice required or permitted under the contract, and may be in substantially the following form:

[Prime contractor or remote contractor] furnished labor, materials, or services in furtherance of improvements to real property located at [property description] pursuant to its written contract with [owner, prime contractor, or remote contractor]. As of the date of this letter, [owner, prime contractor, or remote contractor] owes [prime contractor or remote contractor] the sum of [amount past due], which is past due or for which [prime contractor or remote contractor] asserts it has not been paid from [owner]. Such amounts were due on or before [insert due date] pursuant to the written contract between the parties. Pursuant to T.C.A. § 66-34-603, [prime contractor or remote contractor] demands [owner] furnish reasonable evidence that [owner] has made financial arrangements sufficient to fulfill its obligation to make all payments in accordance with the written contract or setting forth adequate legal reasons for your failure to make payment, within ten (10) days of your receipt of this letter.

(b) This section may not be waived by contract.

(c) This section does not apply to the state and any department, board, or agency thereof, including the University of Tennessee; counties and municipalities and all departments, boards, or agencies thereof, including all school and education boards; and any other subdivision of this state.

As a matter of public policy, except as specifically noted, compliance with §§ 66-11-104, 66-34-205, 66-34-304, 66-34-602, and 66-34-603 may not be waived by contract and these sections are applicable to all private contracts and all construction contracts with this state, any department, board, or agency thereof, including the University of Tennessee, all counties and municipalities and all departments, boards, or agencies thereof, including all school and education boards, and any other subdivision of the state.

This chapter shall not apply to contracts for the construction of, or home improvement to, any land or building, or that portion thereof which is used or designed to be used as a residence or dwelling place for one (1), two (2), three (3) or four (4) single family units.

(a) This chapter does not apply to any bank, savings bank, savings and loan association, industrial loan and thrift company, other regulated financial institution, or insurance company.

(b) Notwithstanding subsection (a), if a bank, savings bank, savings and loan association, industrial loan and thrift company, other regulated financial institution, or insurance company acts in the capacity of an original owner in the event of building its own structure or assumes a project due to its debtor’s default and proceeds with completion of the project, then the entity is subject to this chapter, except for §§ 66-34-104(c) and (j); however, the retained amount may be deposited in an account within the entity’s own institution.

(c) Notwithstanding subsection (a) or any other provision of this chapter to the contrary:

(1) A bank, savings and loan association, industrial loan and thrift company, other regulated financial institution, or insurance company shall pay any sums held in trust pursuant to § 66-34-205 in accordance with an order of any court issued pursuant to § 66-34-602; and

(2) A bank, savings and loan association, industrial loan and thrift company, other regulated financial institution, or insurance company is not liable for damages pursuant to § 66-34-104(c) based on the failure of an owner to place retainage in a separate interest-bearing, escrow account as required by § 66-34-104(a).

Without limiting any existing law or regulation, it is not against the public policy or public interest of this state for a provision in any agreement relating to the design, planning, supervision, observation of construction, repair, or construction of an improvement to real property to limit the liability of the person furnishing the labor, materials, or services to a reasonable monetary amount.

This part shall be known and may be cited as the “Prompt Pay Act of 1985.”

As used in this part, unless the context otherwise requires:

(1) “Acquire” means to derive a benefit from, whether by lease, grant, expenditure, or otherwise;

(2) “Agency” means any entity of the state government, as defined in § 4-5-102;

(3) “Business” means a business organization in any form, institution, association, profession, occupation or calling of any kind, whether or not conducted for profit;

(4) “Property” means anything of value, including, but not limited to, real estate, tangible and intangible personal property, contract rights, choses-in-action and other interests in or claims to wealth, admission or transportation tickets, captured or domestic animals, electric or other power and signatures which purport to create, maintain or extinguish any legal obligation; and

(5) “Service” means labor that does not include a tangible commodity. “Service” includes, but is not limited to: labor; professional advice; services provided by health care providers to medicaid recipients upon filing of a properly completed claim form; telephone, cable television and other utility service; accommodations in hotels, restaurants or elsewhere; admissions to exhibits and entertainments; the use of machines designed to be operated by coin or other thing of value; and the use of rented real or personal property.

An agency which acquires property or services pursuant to a contract with a business shall pay for each complete delivered item of property or service in accordance with the contract between the business and agency or, if no date or other provision for payment is specified by contract, within forty-five (45) days after receipt of the invoice covering the delivered items or services.

(a) Interest shall accrue and be charged on payments overdue under § 12-4-703 at one and one-half percent (1½%) per month beginning on the day after payment is due.

(b) Interest which is unpaid at the end of each sixty-day period or at the end of any specified period provided by contract shall be added to the principal amount of the debt and shall thereafter accumulate interest.

An agency may not seek additional appropriations to pay interest which accrues as a result of its failure to make timely payments required by § 12-4-703.

This part is not applicable if an agency’s failure to pay timely interest required by § 12-4-704 is the result of a dispute between the agency and the business over the amount due or over compliance with the contract.

(a) Upon payment by an agency, a business which has acquired under contract, property or services in connection with its contract with such agency from a subcontractor or supplier shall pay the subcontractor or supplier within thirty (30) days after receiving payment from the agency.

(b) Interest at the rate of one and one-half percent (1½%) per month shall accrue and is due any subcontractor or supplier who is not paid within thirty (30) days after the business receives payment from the agency, unless otherwise provided by contract between the agency and the business, or by contract between the business and the subcontractor or supplier. Interest begins to accrue on the thirty-first day at the rate specified in this subsection (b).