Fact or Fiction: Collections

Collections: Fact or Fiction?

Collections are often an issue in the construction industry. Do you know whether the following statements are fact or fiction?

In most states it is legal to charge 18% per annum (or 1.5% per month) interest to individual customers on past due balances in collections.
FICTION. When contracting with an individual person (as opposed to a business entity), most states impose a maximum amount of interest that may be charged on past-due accounts that is much lower than 1.5% per month. Further, to charge the maximum amount many states require a signed agreement with the individual containing that rate. Absent an agreement in writing, the rate that may be charged is often even lower. The maximum rates vary among each state, and handful of states (such as Arizona and Massachusetts) do allow charging individuals 18% on past due balances if that rate is stated in a signed contract.

If I receive a check for less than the full amount due and that says “Payment in Full” in the memo section, I cannot pursue the balance later.
FACT. A check is a “negotiable instrument” and can form a contract. If it contains 1) a dollar amount, 2) a notation indicating payment in full, and 3) is signed by the issuer and the recipient (by endorsing it), then a contract is formed and the recipient has agreed to that amount as payment in full.

As a subcontractor or supplier to a general contractor, if you do not preserve lien rights you may still sue the property owner if you are not paid.
FICTION. Unless your contract was directly with the property owner, in virtually all cases your only recourse against the property or the property owner is a mechanic’s or construction lien. If you do not preserve those lien rights, un- less there are special circumstances, you may only pursue the party that hired you or that purchased the materials from you.

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Contract clauses providing that the general contractor is not required to pay subcontractors or suppliers, unless the owner pays the general contractor, are enforceable.
FACT. A contingent payment clause (or “pay if paid” clause) shifts the risk of nonpayment by the owner from the general contractor (GC) to the subcontractors and suppliers (subs). However, the clause must clearly and unequivocally state that the owner’s payment is an absolute condition to the GC’s obligation to pay the subs. For example, a clause that simply states that the GC shall pay the subs within seven days after the owner pays does not eliminate the GC’s duty to pay the subs. Instead, it only states the timing for payments. Only if the clause unequivocally states that the GC’s duty to pay the subs is conditioned upon the owner’s payment will the clause be enforceable.

Blake Nelson is an attorney with Hellmuth & Johnson in Minneapolis and concentrates his practice on advising and representing clients in the construction industry. He can be reached at bnelson@hjlawfirm.com.

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