The Tennessee Prompt Pay Act allows a contractor or subcontractor who has not been paid to recover, in addition to the amount owed under its contract, an award of attorneys’ fees (and interest). The recovery of attorneys’ fees is not automatic, but depends on convincing the judge or jury that the other party, whether it was the owner, general contractor or another subcontractor, acted in bad faith. The Act only allows a court to award attorneys’ fees where the party who failed to pay acted in bad faith.
Before we take a look at what Tennessee courts require to prove bad faith, let’s consider some other requirements of the Tennessee Prompt Pay Act. Even if you can prove that an owner, contractor or another subcontractor has acted in bad faith, if your case does not fall within the protections of the Prompt Pay Act, you will not be able to use that Act to recover your attorney’s fees. For the most part, only in construction contract cases covered by the Prompt Pay Act does Tennessee law allow the prevailing party to recover attorneys’ fees by statute. There is an exception to that rule which occurs frequently: If parties to a construction contract have contractually agreed between themselves that, in the event of litigation or arbitration, the prevailing party is entitled to an award of attorneys’ fees, then they can be recovered even where no Tennessee statute permits their recovery.
The Prompt Pay Act does not apply to residential construction unless the construction involves more than four single-family units. To recover attorneys’ fees under the Prompt Pay Act, a contractor or subcontractor, as the case may be, must provide written notice to the party who has not paid by registered or certified mail, return receipt requested. The notice must state the provisions of the Act on which the unpaid party intends to rely and of that party’s intent to pursue remedies provided by the Act if payment is not made within the time designated in the Act.
So, assuming that your construction case falls under the Prompt Pay Act and that you gave the required notice, what must you establish in order to prove bad faith on the part of the other party? Under Tennessee law, whether or not there was bad faith is a factual determination. It is up to the discretion of the judge or jury to decide whether there was bad faith. There is no formula which can be applied to determine whether there was bad faith, but each case has to be decided on its own unique facts.
A look at the facts of the case of Madden Phillips Construction v. GGAT Development (Tenn. Ct. App. 2009) can give you some idea of what kind of facts might lead a Tennessee court to find bad faith in a construction contract case. In that case, a contractor (“Contractor”) entered into a written contract with a developer (“Developer”) for work related to a subdivision.
After Contractor had performed about ninety percent (90%) of its work, and had requested a change order for $5,000 in extra work needed to prepare a road for paving, Developer terminated the contract. Notably, Developer’s letter of termination gave no grounds for the termination. After terminating the contract, Developer withheld payment to Contractor of $29,000 in pay applications and refused to refund retainage in the amount of $30,000.
In finding that Developer had acted in bad faith and was responsible for the attorneys’ fees of Contractor, the court pointed out that Developer had terminated Contractor after ninety percent (90%) of its work was complete; without giving Contractor an opportunity to cure its allegedly deficient work; and without paying for services already rendered by Contractor. The court also noted that the majority of the complaints made by Developer about Contractor’s work arose after Developer terminated the contract. The court concluded by stating that Developer could not have honestly believed that it did not owe Contractor the money claimed by Contractor.
As noted above, in many breach of construction contract cases, there will be a contract term in a written contract between the parties which will shift the attorneys’ fees to the non-prevailing party. In cases where no such term exists, the Prompt Pay Act may allow a contractor or subcontractor to recover a substantial amount in attorneys’ fees.