Explanation required to withhold payment from a Delaware construction contractor.

In this construction contract dispute, the court awarded prejudgment interest, but not attorneys fees, to a roofing contractor under the Delaware Construction Prompt Payment Act, 6 Del. C. § 3506 where the owner failed to give specific notice within seven days of the date required for payment as to why it was withholding nearly $30,000 from the final payment due the contractor. Under the Act, if a payment is late, interest would be awarded pursuant to a penalty clause for untimely payments and attorneys fees may be awarded if the owner withholds payment without good faith or reasonable cause. Here, the parties entered into a standard American Institute of Architects ("AIA") contract, wherein the architect has certain construction administration duties, including the duty to review payment applications and, if appropriate, submit certificates of payment to the owner. Under the AIA contract, the architect evaluates the payment applications because the issuance of payment certificates is tantamount to a representation that a builder's performance conformed with contract requirements. Although the reviewing architect wrote a letter on closeout materials prior to the payment due date, the letter did not discuss why payment certification was withheld – namely the fact that the roof manufacturer's warranty prorated, and incrementally decreased, the manufacturer's liability over the span of 20 years, which arrangement the architect considered unsatisfactory. Finding that the architect's letter did not articulate this reason for denying payment, the court awarded the contractor pre-judgment interest from the date of breach, the date payment was due. However, attorneys fees were not awarded to the claimant because the decision to withhold payment, although erroneous in that it violated the Act, was not deceitful or made without substantial reason. The lesson to be learned: Project owners or reviewing architects will withhold payment to a contractor at their own peril when they do so without timely articulating specific reasons therefore. For the owner of this project, that lesson was an expensive one.

Case Law Alert - 1st Qtr 2011